Tax fraud happens when a business presents false information to avoid paying their tax dues. Some examples of tax fraud include intentional understating of the income tax, overstating tax deductions, making false refund claims, and overstating expenses. Other types of tax fraud with regards to businesses are operating an unregistered business, paying cash to employees to avoid tax, and opening and closing new businesses to evade tax.
When you receive IRS audit letter
Tax audits are a nightmare for business owners, as they could go either way. The fear that the IRS could discover a mistake, which will cost your business money in terms of penalties, is one reason why businesses hate being audited. Usually, if the IRS has shortlisted your business for auditing, it is because it has noted inconsistencies in your business documentation. The worst that can happen is to get charged for tax fraud. In such a case, you may need the help of a tax fraud lawyer to help you navigate the process and possibly evade some serious consequences.
Civil and Criminal tax fraud
Tax fraud could either be civil or criminal. A civil fraud will result in cash penalties, while a criminal fraud can get you some jail time.
The penalty for civil fraud is 75% of the tax owed, which will also attract interest. If the tax auditor suspects that you committed gross tax evasion intentionally, he or she might ask the tax fraud specialists to look into your case. The specialists will determine whether to take your case to the Criminal Investigation Unit to be prosecuted for criminal tax. If the auditors find you guilty, you could face up to 5 years of jail time, prosecution costs for each tax crime, and fines reaching up to $500,000 for corporations.
How the IRS tells the difference between tax fraud and negligence
According to the IRS, businesses that are most prone to tax cheating are cash-intensive businesses and service businesses. These include restaurant owners, lawyers, accountants, car dealers, and hairdressers. Auditors are highly trained to detect tax fraud and can easily tell between an honest mistake and intentional fraud. They, however, do not routinely expect to find tax fraud in your business dealings. The tax law is quite complex, so they expect to find a few errors during an audit. They will give you the benefit of the doubt most of the time.
Tax offenses such as late filing and negligence may attract a penalty of up to 20% of your tax bill. However, remember that even an honest mistake can land you in trouble because there is no excuse for ignorance of the law. As a business owner, you should know the law and abide by it.
Acts such as keeping two records of financial books or no records at all are very suspicious and could count for tax fraud. Altered checks are also a huge red flag. Another obvious sign of tax fraud is when business owners have a lifestyle that does not match their reported income–for example, owners of a business who have declared bankruptcy but are living lavish lifestyles.
Tax fraud vs. tax avoidance
Tax avoidance is a legitimate way to reduce business taxes. A business can reduce the tax it pays through tax shield strategies which involve deductions. Legit deductions include medical expenses exceeding the standard amount, charitable deductions, mortgage interest expense, and depreciation expenses on business property. Businesses also use tax loopholes to avoid tax. Other methods of tax avoidance include tax credits and deferral plans.
As soon as you get a notice of audit for your business, find out first if the letter is legit or a scam. Double-check the sender information and ensure it has the official IRS symbol and a return address, which states ‘Department of the treasury, Internal Revenue Authority.’ If the letter has the name of any other organization which is asking you to mail a check, treat that as a red flag. If you are not sure if the letter is legit, you can call the IRS number. When your business faces tax fraud charges, a lawyer can help you know your rights and try to help you pay a minimal fine or serve shorter jail time.