A Review of Tax Laws and Penalties


State and federal laws require taxpayers to complete and submit a tax return each year. The returns must report all the individual’s income and provide factual deductions. If there are any sections within the tax return showing discrepancies or issues, the IRS can start an audit and determine if the individual committed fraud. Fraud and tax evasion are serious crimes, and the court could impose serious penalties if the individual is convicted. Reviewing tax laws and penalties shows the individual what they could face if they are convicted.

What Constitutes Tax Fraud?

Under IRS tax codes and laws, they could convict any taxpayer that fails to file any tax returns deliberately or refuses to pay their taxes of tax fraud. If they do not report all income, they received throughout the year, used false deductions, or files a fraudulent tax return, they are guilty of tax fraud or evasion. Individuals who are accused of tax evasion can start their defense by going to Brotman Law today.

How Does the IRS Differentiate Between Tax Fraud and Honest Mistakes?

The tax return would show signs of inflated deductions that equate to thousands of dollars and wouldn’t show an honest miscalculation. For example, if a small business owner claimed all their profits as a loss on their return, this could be tax fraud. However, if they rounded an expense from $395.99 to $400 instead of $396, the IRS could see this as an honest mistake in that maybe the taxpayer wasn’t sure how to address change or round up the figures correctly. With an honest mistake, the IRS would charge the taxpayer a fee for the small miscalculation, but they could also charge a penalty of 20%. However, in this instance, the individual didn’t commit a crime; they just overestimated.

What are Issues That the IRS Reviews?

The IRS will review documents for deductions such as receipts for deductions. The individual cannot write out their own receipts for their deductions. This could raise a red flag if they did this. Any transfers of income to another party could indicate an attempt to hide income if the individual didn’t receive a receipt for the money. More than one financial ledger for a business could indicate that the business has one fraudulent set of records that they present to the IRS and another ledger with the accurate totals.

An individual must also be aware of the concept of an IRS letter to request first-time penalty abatement.

Taxpayers are required to use their own Social Security numbers, and if they use a number that is not factual, this could be an instance of tax fraud. Any claims for dependents that don’t exist could present fraud, too. The same applies to using dependents that died after the year in which they passed, and the individual could be committing tax fraud.

What Penalties Could the Individual Face?

If they didn’t file their taxes deliberately didn’t pay taxes, the court imposes a maximum prison sentence of five years. The individual will pay a maximum fine of $250,000. If they committed tax fraud or provided false statements, the maximum sentence is three years and a maximum fine of $250,000. If they didn’t file a return, the individual could face up to one year in prison or county lockup and a fine of no more than $100,000.

Understanding the Difference between Civil and Criminal Laws

Civil tax fraud or evasion will not lead to criminal charges for the taxpayer, but the individual could face civil penalties that could become hefty. If they are charged with criminal tax evasion or fraud, the individual will receive fines, a prison sentence, and restitution. Examining these laws shows the individual if they are facing a civil or criminal case.

Initiating a Tax Audit

The taxpayer will receive a notice from the IRS that explains that the individual is being audited and why. The mail-in audit requires them to complete documents and gather receipts, showing their deductions and any records for expenses. The IRS will provide an explicit list of all items they need for the audit. If the individual doesn’t have these records, it could lead to penalties or issues with the IRS.

The audit is used to find any instance of fraud or false statements on the tax returns. The IRS can conduct an audit for returns spanning back ten years if they choose. The audit itself could last up to three years, depending on how quickly the individual returned their documents to the IRS. Typically, a standard audit lasts around one year, and if it is a mail-in audit, the individual could complete their audit in under six months. If the IRS doesn’t find any fraudulent information, the individual will not receive any criminal charges. However, any discrepancies could lead to a penalty.

What If the Individual Doesn’t Pay a Tax Lien?

If the taxpayer has a tax lien, they could face legal collection efforts. The IRS can seize the individual’s financial assets to pay the overdue tax payments. This could include seizing the individual’s balance of their checking or savings account. If they own physical assets such as real estate, the IRS could seize the property if the tax payments are close to the value of the property. The IRS won’t give the individual any warning about the legal action. The taxpayer receives a notice about how much they owe the IRS only, and they are given a deadline to pay the taxes. If they do not contact the IRS to set up a payment plan, the IRS will initiate collection efforts, and the taxpayer will not know until it is too late. Taxpayers must follow all tax laws and codes to avoid civil and criminal penalties. If the court convicts the individual of a criminal offense, they will serve time in prison and pay a hefty fine. They base the prison sentence and fee on how much the individual owes the IRS in tax payments. If the individual forgot to file, they may not face criminal charges, but the IRS can impose civil penalties based on an extra 20% of what the individual owed for the year. Reviewing tax laws and fraud charges shows the individual what they must do to rectify tax issues and avoid prison.

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