Tax Fraud Penalties: Understating Income & Fradulently Failing to File

Tax Fraud Penalties & IRS Income Taxes

tax fraud penaltiesThe IRS, like many States, punishes taxpayers with severe civil tax penalties for fraud. In fact, the IRS actually provides a form and phone numbers for people to report individual taxpayers or companies that are not complying with the tax code. Most Americans either use tax software or a tax professional to help file their taxes. Whatever method you use when filing, you are held responsible for any penalties related to fraud.

Last year alone, 2,305 individual taxpayers incurred fraudulent civil income tax penalties, and 140 fraudulent business income tax penalties were assessed. These numbers, as a percentage of taxpayers, is very low and has declined from the previous year. There are two major types of fraud penalties discussed below:

General Civil Tax Fraud Penalty Found In Code Section 6663

If the IRS serves you with an audit that clearly shows you intentionally under-reported or omitted income in order to pay less tax, you could be facing a stiff penalty of 75% on the underpayment tax amount. This penalty is only applicable to tax returns that are filed. The IRS needs to prove that the underpayment of tax was clearly intentional and deliberate. In order for the IRS to prove this, such examples might include:

  • The Purposeful Avoidance of Record Keeping
  • Hiding or Omitting Income or Assets
  • Destroying or Altering Evidence (Books, Logs, Receipts or other records)
  • Lying to IRS agents during an audit investigation
  • Keeping Two Separate Books
  • Claiming a Deduction for A Dependent When You Are Single
  • Using A False Social Security Number
  • Utilizing cash only to conceal income
  • Using offshore entities, shell accounts, or trusts to hide income

In most cases, if the IRS proves that a part of the tax underpayment was due to fraud, it will assume that the whole tax understatement is attributed to fraud, unless you as the taxpayer can prove them wrong.

When a civil tax fraud penalty is present, no other penalty related to the accuracy of a return may be stacked on. However, any portion of the underpayment not attributed to fraud may be penalized with an accuracy related penalty.

Fraudulent Failure to File Civil Penalty from Code Section 6651(f)

If you filed a return late (more than 60 days old), or you did not file, and the IRS can prove it was "fraudulent" or that you did not file to evade taxes, then, you could be facing a stiffer Failure to File Penalty. Instead of incurring the normal 5% per month penalty on the amount owed, you would be facing a 15% percent per month penalty with a maximum 75% total penalty.  If you experience a Fraudulent Failure to File Penalty and Failure to Pay Penalty in the same month, the former is reduced by .5%. It is important to understand that his type of penalty is not normally assessed. Some reasons the IRS may assess this penalty:

  • You are unable to explain why you did not file or you refuse to explain why
  • You have a history of failing to file a tax return or a tax return on time
  • Your reason for not filing does not fit with any of the facts of the case
  • You knew about the filing requirement

NOTE: If you become deceased, or you file for bankruptcy, it will usually  not release any portion of your tax debt due to fraud.

One major difference between tax fraud penalties, and other types of penalties, is that the burden of proof is on the IRS and not the taxpayer. Realize that if you filed a joint tax return, fraud penalties will not be applicable to your spouse, unless, part of the underpayment was caused by your spouse.