How The IRS Tells The Difference Between Negligence And Tax Fraud

Cheating on your taxes is a crime. However, only .0022% of taxpayers are actually convicted of a tax crime. This percentage is surprisingly small especially when you take into consideration that the Internal Revenue Service estimates approximately 17% of taxpayers do not comply with tax laws in one way or another. Over the past ten years, the number of tax crime convictions has decreased.

The IRS reports that individual, middle income earning taxpayers account for 75% of the cheaters. Corporations account for the majority of the rest. The worst tax cheaters are usually workers from the service industry and other cash intensive businesses from handyman to professional doctors. For example, the IRS makes the claim that waitresses and waiters, on average, underreport their tips in cash by 84%.

How Taxpayers Cheat

Many of the people who cheat on their taxes deliberately underreport income. A study performed by the government found that the bulk of people that underreported income were clothing store owners, self-employed restaurateurs and car dealers. Salespeople and telemarketers were next followed by doctors, attorneys, accountants and hairdressers.

A far distant second were taxpayers that are self-employed who over deduct their business expenses including car expenses. The Internal Revenue Service has surprisingly concluded that a mere 6.8% of tax deductions are actually overstated or false.

When you are caught cheating on your taxes by an IRS auditor, you can just have to pay penalties and civil fines or your case can be referred to the division of criminal investigation.

Negligence or Fraud?

IRS auditors have been trained to find tax fraud, an act done willfully with the intent to defraud the Internal Revenue Service. That is beyond making an honest mistake. Examples of fraud include keeping 2 sets of books, using a fake social security number or claiming dependents when you have none. Even though auditors have been trained to look for tax fraud, they do not start off suspecting it. They have an understanding about how complicated the tax law is and expect all tax returns to have a few errors. Normally, they’ll give you the benefit of the doubt and they will not come after you if they believe you made an honest mistake.

If you made a careless mistake, you could receive a 20% penalty on your tax bill. While this is not great, it is better than a 75% penalty for fraud. Even to the courts and the IRS, the line between fraud and negligence is not clear. Auditors are able to spot common problems on tax returns that constitutes fraud such as fake receipts, altered checks and businesses without records.

The chance of being convicted of a tax crime is extremely low but it does occur. If you are being accused of fraud, you need to hire the best legal counsel specializing in tax crimes.

What To Do If Your Refund Is Stolen

I recently wrote about an incident where IRS employee filed returns under different tax payers name and walked away with their refunds.  Today, I want to add more to this conversation.

 This topic is especially interesting to me because I spend lots of time education clients about security risk involved in financial transactions.  Just like last decade, identity theft topped the list of consumer complaints received by the FTC in 2011, with nearly 280,000 complaints, according to a report released on Tuesday.   Now, interesting news is that a bigger chunk of those cases is tax related, with 24% of identity theft complaints being tied to tax or wage-related fraud, up from about 15% in 2010, according to the FTC.  This is cause of concern for most tax payers – no matter how and when they file their tax return.

Victims may not discover this kind of fraud until they file their tax return and receive a rejection note from the IRS.   In some cases, it may take even longer to know something is wrong.  Victim may wait couple of months waiting for their refund check only to find out someone else  has already filed a return or information of your tax return do not match the IRS records.

Are you concerned about this kind of fraud? IRS advice taxpayers to report suspected fraud by calling 1-800-908-4490. This number will connect you with department specialized in dealing with identity theft problems.  IRS also recommends taxpayers to hold on to any letters sent to them from the IRS.  Taxpayer will need to fill out the IRS Identity theft Affidavit, a form for reporting fraud or suspected fraud, and file it with IRS.  Moreover, Victims of such fraud will also need to prove their identity by sending in documents; such as W-2 forms, previous tax returns and a photo ID.  Fraud victims should also check their credit reports for recent activities and alert the credit reporting agencies about any accounts or charges fraudulently made in their names.  Taxpayer should also check their bank account and change their password for all online accounts.  In addition to all, The Federal Trade Commission also recommends filing a report with your local police department and placing a fraud alert on credit reports. This can help police catch the fraudster on the run and save you from future trouble.

How long does it take to get your stolen refund back?

Humm – depends on IRS, and your luck.  I have heard of cases where it took more than a year to get this mess cleaned up and you can expect at least six month in most cases.  

Want to know the process of IRS?

I am not sure but from what gathered on the internet is that IRS has to confirm the victim’s identity, track down the fraudster and locate the funds.  Once all is said and done, victim will get the refund along with very tiny interest.

As I stated earlier, tax return fraud is on the rise and agency has stepped up enforcement actions, including the use of latest technology to identify false tax returns before the refunds are issues.   Just to give you an idea, in the month of January, 58 arrest were made related to tax frauds.   IRS is also actively warning tax payers about this kind of fraud.  You can now find special fraud section on IRS website that is regularly updated with new information.

How can you protect yourself?

Simple – do not share your information with others.   Fraudsters collect tax payer information via emails, websites, phone calls and now using social media.   Under no circumstance give out your personal information to anyone no matter how legit it may sound.  IRS already has your information and therefore they will never ask for your social or any other personal information.