Don't Let Your Taxes Make You a Criminal

The IRS is watching you. Think underpaying, not paying at all, or making a mistake on your tax return just means a possible penalty or added interest? Not exactly. In fact, many tax mishaps carry criminal penalties. Some of the most common tax offenses that carry both civil and criminal penalties are: failure to pay tax, failure to file a return, failure to keep records, failure to supply information, filing a false tax return, filing a false claim for refund, and assisting any person with any of the aforementioned acts.

Common sense, right? It is pretty obvious that blatantly not filing a return or paying what you owe can result in stiff penalties, but even if you think you’re doing everything right you could find yourself in hot water. The good news is most of the time this can all be avoided if you simply respond to the IRS when they notify you of a problem and then take corrective action. There are a number of ways to avoid and fight a tax audit, but ignoring the letters from the IRS is not one of them.

IRS Criminal Investigations in 2007

So, just how many people get caught and criminally sentenced? It may not seem like a lot, but the IRS has said they are cracking down. 2007 was the highest number of investigations since 1997 and they claim to be searching for offenses even more aggressively these days. But here are the stats for 2007:

  • Investigations Initiated: 3,204
  • Prosecution Recommendations: 2,107
  • Information/Indictments: 1,818
  • Total Convictions: 1,620
  • Total Sentenced: 1,592
  • Percentage Sent to Prison: 80.4%
  • Average Months to Serve: 41

There you have it. 80% are actually getting sentenced to prison and the average offender will spend nearly four years behind bars. I don’t know about you, but those aren’t any stats I want to mess with. Here’s a common example:

Texas Man Sentenced for Filing Fraudulent Tax Returns

On August 10, 2009, in Sherman, Texas, Samuel Perez, of Corinth, Texas, was sentenced to 41 months imprisonment, to be followed by three years of supervised release, for filing fraudulent tax returns for tax years 2002 and 2003. The court also order Perez to pay a $100 special assessment, and $303,324 in restitution. According to the indictment, Perez filed Individual Tax Returns for tax years 2002 and 2003 that reported income of $77,561 and $77,686 respectively, when in fact, he knew his income for those tax years was in excess of those amounts due to income he received and concealed in the form of checks that were made payable to third parties.

Avoiding Problems With the IRS

The vast majority of people have absolutely nothing to worry about. If your taxes are simple, you file on time and accurately, and pay what you actually owe you should be just fine. But if you made a mistake a few years ago and never got caught or heard anything from the IRS about correcting it and think you’re in the clear, you might want to be careful. Just because you may not have been audited it doesn’t mean you slipped one by.

The IRS is continuously collecting information about taxpayers with what are called Informational Returns. These Informational Returns are forms that are required to be filed with the IRS reporting just about every type of transaction involving the exchange of money or sale of property. These returns are not just limited to W2′s and 1099′s any more.

So, do the right thing and report all of your income. Even if you aren’t issued a 1099 or get paid in cash, you better be keeping track of everything. Also, make sure you’re keeping financial documents in a safe place for a number of years. If the IRS comes to you requesting more information about a return the burden is on you to produce documentation to prove your claim. Finally, if you have a unique tax situation or some hidden tax skeletons in your closet it might be worth it to find an CPA to help with your taxes. When it comes to resolving issues with the IRS you certainly don’t want to go about it alone.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.