According to IRS, every American citizen is responsible for filing their own tax return when required to do so through a duty known as voluntary compliance. Fortunately the majority of Americans comply by determining and paying the correct amount of taxes to the government. However, there are many that willfully and intentionally violate their legal duty of voluntary compliance by failing to pay the correct amount of income, employment, or excise taxes.
Although some Americans live in fear of the IRS because they owe back taxes to the IRS, there is a big difference between owing a few hundred dollars because of mistakes on your previous tax return and committing tax fraud. In committing tax fraud you deliberately break the tax law by providing incorrect information on your tax returns for the purpose of some type of gain. Activities the IRS determines as breaking the tax laws include but are not limited to:
* deliberately underreporting income
* deliberately omitting income
* keeping two sets of books
* overstating the amount of deductions
* making false entries in books and records
* claiming personal expenses as business expenses
* hiding assets or income
* claiming false deductions
* transferring assets or income
In order to combat tax abuses the IRS created the Criminal Investigation Division that strives to correct the issues of improper tax filing and payment. The Criminal Investigation Division of the IRS investigates a wide array of individuals and industries including business owners and self-employed wage earners. It is the main component of the IRS’s efforts to directly influence taxpayer compliance.
The Tax Fraud Program is the Criminal Investigation Division’s largest enforcement program that covers a variety of tax fraud and tax and money laundering crimes. According to IRS statistics there were 1,863 investigations initiated by the Tax Fraud Program in 2006, leading to nearly 700 people being sentenced and incarcerated for breaking the tax law.
The Tax Fraud Program classifies tax fraud crimes into two basic programs, legal source tax crimes and illegal source financial crimes. Legal source tax crimes involve people who earn wages legally but choose to evade taxes by violation of tax laws. These cases involve behaviors that threaten the tax system, such as questionable claimed refunds, unscrupulous tax return preparers, and persons who challenge the legality of income taxes. The prosecution of these cases is essential in supporting the IRS’s overall compliance goals, encouraging voluntary compliance with the tax laws, and promoting fairness and equity in the American tax system.
The second program, illegal source financial crimes, focuses on money gained through illegal sources of income, such as illegal gambling. According to the IRS, these underground operations threaten our “voluntary tax compliance system and undermine the overall public confidence in our tax system.” The IRS demands that taxes be paid on money earned through any means, therefore many recipients of illegal income attempt to legitimize their income. This process of “cleaning” the illegally obtained money is known as “money laundering.” The IRS deems money laundering as “tax evasion in progress.”
Nowadays, money launderers use various schemes and transactions to conceal income and assets. This includes manipulation of currency reporting requirements and the layering of transactions. Since money laundering and currency violations are often intertwined with tax violations, the illegal source financial crimes program encompasses many tax and tax related violations.
The punishments and penalties for tax fraud issues vary from cases to case. However, according to the US tax code (sections 18 and 26) some violations of tax law carry penalties of up to five years in prison with fines up to $250,000.00 for individuals and $500,000.00 for corporations. According to IRS statistics, the average incarceration sentence for tax fraud crimes in 2006 was 26 months.
The important thing to remember is to be completely honest when preparing your income tax returns. Alternatively, you should seek a competent professional to prepare your returns for you. If you follow your legal duty of voluntary compliance and pay your taxes without hiding income then there is never a reason to worry.