Is It Possible To Commit Tax Fraud Without Knowing?

Is it possible for a law-abiding citizen to defraud the IRS without knowing?

The answer might surprise you - absolutely.

Committing tax fraud unknowingly often happens when filling out a return. You might not go to prison for this, but the IRS will penalize you in some way or another.

Since this agency is serious about all forms of fraud (even accidental ones), you need to make sure you’re not doing anything illegal when dealing with your taxes.

This is why today, we’ll explain tax fraud and evasion, as well as show you how you can keep away from committing tax fraud by chance.

Tax fraud and evasion explained

Tax fraud, as defined by the IRS, is intentional wrongdoing by taxpayers in an effort to evade the tax they owe. So in other words, for something to be considered fraud, you need to show fraudulent intent while also having a tax debt you’re trying to avoid.

Evasion, on the other hand, is a specific category of tax fraud. It’s the act of evading a tax or avoiding paying a tax. For instance, understating and omitting income, improperly claiming exemptions, along with concealing assets are all considered evasive acts by the IRS.

It’s important to note that tax avoidance and tax evasion are not the same thing. Avoidance is using legal deductions and tax loopholes that help you circumvent paying some taxes by law. 

Ways you might be committing tax fraud unknowingly

To remain in good standing with the IRS, you need to ensure that everything you do complies with the letter of the law. Here are some surprising examples of tax fraud you can do by accident:

1. Claiming the earned income tax credit when you’re not eligible

This credit is designed to offset the burden of taxes for low earners. Taxpayers who qualify for it can receive $600 if they have no children, $3,900 if they have one child, $6,600 for two children, and approximately $7,400 if they have three or more kids. 

If you claim this credit without being eligible, you’ll trigger an audit by the IRS.

Keeping this particular blunder at arm’s length is not that hard. Simply don’t file for this credit if you have investment income that exceeds $10,500. Keep in mind that the eligibility for this credit can fluctuate, which is why we recommend brushing up on the requirements every tax season to be on the safe side.

2. Filing inaccurate tax returns

If you file a return that contains inaccurate or incomplete information, you’re actually committing tax fraud. For example, omitting some forms or entering your social security number incorrectly could put you under IRS scrutiny. 

You can avoid this by being super diligent, hiring a tax preparer, or by using tax preparation software that doesn’t let you submit forms unless you enter all the required information.

3. Abusing tax shelters

While they sound like a good idea, oftentimes vague tax shelters offer benefits that are at odds with your financial needs or provide coverage for implausible circumstances. 

This is why you should never leverage tax shelters without seeking an opinion from a tax attorney or expert. In fact, abusing tax shelter opportunities can end up costing you more in the long run. 

4. Failing to report all your income

Omissions happen, but failure to report all your cash income can be seen by the IRS as committing tax fraud or failing to supply all information. 

While some income is hard-to-track, you need to make sure you’re up to date with what the IRS considers nontaxable and taxable income.

5. Not being accurate with deductions

Small business owners and self-employed individuals can deduct business expenses from their income. However, you need to make sure you only deduct necessary expenses. 

For instance, don’t make the error of thinking that you can take a friend on a business trip to deduct the costs of the vacation as a legitimate business expense. It’s true that some deductions can be chalked up to a simple miscalculation such as writing off groceries as a business expense, but knowingly lying to get more money is the textbook definition of committing tax fraud.

The same applies to taking inflated deductions, like claiming your attic repair as a home office deduction.

To steer clear of such mistakes, we once again recommend consulting a tax attorney or using tax prep software that automatically shows you deductions for which your business qualifies. More importantly, never misrepresent facts - if you have no means of paying everything at once, try to set up a payment plan with the IRS.

Getting duped by your tax preparer

You may rely on your tax return preparer for all your tax needs, but it still doesn’t spare you from committing tax fraud. Not every professional is the same, and some may even convince you to claim different deductions or credits you’re not entitled to, just so they can increase their own fees.

If you want to work with a tax preparer, always check their credentials online.

The consequences of committing tax fraud

Committing tax fraud comes with a fine of up to $100,000 and a three-year prison sentence. You may also receive a hefty penalty of 75% of the amount you didn’t pay due to fraud. 

Tax evasion has even more dire consequences. While the fines are the same as with fraud, the prison sentence can be up to five years.

If you fail to pay taxes, file a return, or keep proper records, you may receive a prison sentence of up to five years and a fine of up to $25,000.

But what about making mistakes on your tax returns?

Expect to receive a penalty of 20% for the amount you underpaid. Additionally, your return will take longer to process and the IRS might potentially target you for tax fraud. 

Get in touch with the Law Offices of Mary E. King if need help with your taxes

As you can see, errors in your tax returns, no matter how innocent, can land you in hot water. This is why having an experienced attorney on board is sometimes a must, especially for business owners.

A tax attorney can not only apply their knowledge of the tax code to save you money from unnecessary or inaccurate payments, but they can also help you if you’re under an IRS audit or being accused of committing tax fraud. 

By contacting the Law Offices of Mary E. King, you get to work with a tax attorney who has decades of experience handling all sorts of tax issues.

Call 941-906-7585 or fill out our online contact form to schedule an appointment - your first step in protecting your rights as a taxpayer.

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.