If you live and work in California, you're likely subject to federal and state income taxes. If you're caught cheating on your taxes to avoid having to pay, not filing taxes at all, or making certain mistakes, it could result in charges of tax fraud.
Both the Internal Revenue Service (IRS) and the state of California impose harsh penalties if you try to avoid paying your full taxes. Any dispute or mistake regarding your taxes must be settled as soon as possible to avoid these penalties.
Our firm handles income tax fraud disputes in California and is prepared to help you with your case.
What Is Tax Fraud in California?
Income tax fraud is intentionally falsifying information on an income tax return to limit your amount of tax liability. One of the most common forms of tax fraud is tax evasion. To be charged with tax fraud, you have to willfully submit false returns to the IRS or state authorities. The federal tax code is complex, and mistakes happen. Tax authorities won't charge you with tax fraud for simple errors.
However, you do have a responsibility to fill out your income tax return to the best of your knowledge and ability. To avoid mistakes, consider hiring a professional familiar with state and federal tax law to file your return.
Reducing mistakes on your return is imperative because it minimizes the chances of an audit. If the IRS or state of California sees several errors on your return, they might start digging further. If the audit shows you didn't fully declare your tax liability, you could face penalties and pay interest on your balance. If the audit shows that you intentionally understated your tax liability, authorities may accuse you of tax fraud.
Tax Fraud vs. Tax Avoidance and Negligence
Tax fraud isn't the same as tax avoidance. Tax negligence also differs from tax fraud and tax avoidance. Tax fraud is deliberately omitting information on a tax return, whereas tax avoidance uses legal means to reduce tax expenses. Tax avoidance takes advantage of loopholes to minimize your tax burden, but it's not a violation of tax law. Negligence is failing to adhere to tax law, but unintentionally. Even though it's not willful, you can still be fined by the IRS if you're found guilty of negligence.
Signs of Tax Fraud the IRS Looks For
What does the IRS look for during an audit? There are common indicators that tip revenue officers off to potential tax fraud.
What does the IRS look for during a tax fraud audit?
- Intentionally not filing an income tax return
- Declaring less income than you made in a year
- Not reporting cash income
- Reporting sales less than the sum of your 1099's
- Many cash deposits
- Running a business that relies primarily on cash income
- Claiming dependents who don't exist
- Claiming personal expenditures as business expenses
- Not keeping accounting books accurate or updated
- Using a false social security number
- Discrepancies between your business' accounting books and your tax returns
- Backdating financial documents
- Using unreported foreign bank accounts
Knowing what the IRS looks for can help you avoid making damaging mistakes.
During an audit, IRS officers will give you a chance to explain any irregularities they find. You must comply with their request for documentation—including requests for backup documentation. Keep proof of everything you declare on your tax return. If there's no documentation of something, it's suspicious. Always keep backups of your tax and financial documents for three years after filing a return.
Tax Fraud and Individuals
As an individual, you might think you're less likely to be charged with tax fraud. It's only businesses and corporations that get in trouble with the IRS, right?
Not exactly. Three-quarters of all tax fraud cases in the U.S. are brought up against individuals. But it's usually self-employed individuals or independent contractors that have issues with income tax fraud. So tax fraud does center around business, but more small, one-person businesses than large corporations.
It's easier for small businesses and independent workers to hide income than it is for larger companies. Many contractors think that since they're a one-person operation, they're more likely to get away with underreporting income, too. For this reason, it's essential to keep detailed financial records if you're a self-employed worker, especially if your business is cash-intensive. Independent contractors can easily make mistakes on their taxes. Since the majority of tax fraud cases involve self-employed individuals, it makes them targets for the IRS.
What Are the Penalties for Tax Fraud?
You can face severe penalties from either California or the IRS if either one determines that you're guilty of income tax fraud. The IRS can also choose between imposing civil penalties or criminal penalties.
Civil Tax Fraud
The civil penalty for tax fraud is a fine of 75% of the taxes due. If you owe $100,000 and you're hit with a fine, you now owe $175,000 plus any interest that accrues in the time it takes you to pay the full penalty. Negligence can come with a 20% penalty of the original amount owed as well.
Although you can't serve jail time for civil tax fraud, the penalties can still be harsh. On top of the 75% fine, the IRS can add penalties for the following:
- If you haven't filed a return for one or more years
- If you haven't paid the right taxes for one or more years
- If you haven't disclosed or reported foreign accounts, assets, investments, or income
Civil Tax Fraud Penalties in California
In California, the civil penalties for tax fraud mirror the federal penalties. If you can't pay the balance on your tax account, the IRS could place a lien on your property, seize your assets, or garnish your wages.
Criminal Tax Fraud
Whether the IRS decides to pursue criminal or civil charges may depend on the type of tax fraud you commit. Understating income, claiming dependents that don't exist, or overstating business expenses could lead to a civil charge. Offenses like tax evasion, failing to file a return, or falsifying statements might lead to criminal charges.
The punishment for underreporting tax liability to evade payment (tax evasion) is a felony. You could receive up to five years in jail, and $100,000 in fines, $500,000 if you're a business.
For failing to file a return or pay taxes when they're due, you could get a misdemeanor. It's punishable by one year in jail and $100,000 in fines, $250,000 if you're a business.
Falsifying statements is a felony, punishable by up to three years in prison and $250,000 in fines. Businesses could receive $500,000 in fines.
Criminal Tax Fraud Penalties in California
Tax evasion, supplying fraudulent information on your tax returns, and intentionally underreporting your income are also crimes in the state of California. If you commit tax fraud on your state taxes, you could get up to one year in county jail or state prison, along with fines up to $20,000.
California can also demand you pay your back taxes (if you have any) and has the authority to place a lien on your property until you pay. If you cannot pay your tax bill, the state can seize your property. Also, if you're one of the state's top 500 delinquent taxpayers, your name is added to a publicly searchable database.
How Do You Know the IRS is Auditing You?
The IRS will notify you if you're under audit, usually with a letter called Notice of Audit and Examination Scheduled. The IRS usually contacts you via mail only, so if you receive a phone call or email about an audit, it's probably fraudulent. Your audit letter will contain the details of your audit, like which items on your return are under review, and if you need to send additional documents. The IRS is also required to give you a reasonable deadline to compile the necessary documents.
How Do You Know if You're Under Criminal Investigation by the IRS?
Although the IRS must inform you when you're under audit, they don't have to if you're under investigation by the Criminal Investigation Division (CI). One sign that your case has moved from civil to criminal investigation is if an IRS agent that was in contact with you before no longer returns your calls. That agent was probably removed from your case after it became criminal.
Some other, more obvious signs are if the IRS contacts your bank or your accountant, subpoenaing for records. A CI agent working on your case might also inquire into potentially sensitive transactions on your accounts or ask you more about the intent of your transactions. Also, if a CI agent ever tries to get information from you without counsel present, that's a clear sign that your case has moved to a criminal investigation.
If you see any of these warning signs, you should contact a tax attorney immediately.
Fight Tax Fraud in California
If the state of California or the IRS believes you've committed tax fraud, you should speak with a tax attorney as soon as possible. Contact a California Tax Attorney to schedule an initial consultation and discuss your tax situation. When it comes to income tax fraud, know your rights, and understand your options.