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What constitutes tax fraud and what are the penalties?

On Behalf of | Jun 5, 2022 | Tax Crimes

Tax fraud is a term that encompasses a range of activities. The important distinction between tax fraud and an accidental error on a tax return is intention. Knowingly committing the following acts constitutes engaging in tax fraud, which carries potential large penalties and jail time.

Not filing a tax return

If someone who works or is otherwise required to file an income tax return knowingly does not, this is one form of tax fraud. There may be related unlawful activity that leads to not filing a tax return although every situation differs. 

Conversely, someone who requests an extension to complete and file their tax return would not be committing tax fraud. 

Falsifying information on a tax return

The situation of filing a tax return but entering false information with the intent to deceive is also considered tax fraud. Examples of false information include:

  • Knowingly claiming deductions that you are not eligible for
  • Misreporting your income amount
  • Claiming expenses that you didn’t actually incur 

Not paying taxes due

Whether for individual tax returns or for employee withholding taxes, not paying your due taxes with intention can be tax fraud. Like the other possible acts of tax fraud, the element of knowing that you have taxes due and willfully not paying them is a key component. 

If you have arranged a tax repayment plan with the IRS and are making your scheduled payments, you are not committing tax fraud. 

Money laundering

When used to conceal actual money earned to avoid paying taxes, money laundering is also included as tax fraud. The act of money laundering takes proceeds from illegal activities and either diverts or hides those funds in an attempt to not pay taxes or cover criminal acts.

Penalties for tax fraud

Since tax returns and tax fraud situations are complex, there are several factors involved in the IRS assessing penalties or being convicted of a crime. Both the IRS and state or federal courts may investigate potential tax fraud acts, depending on the scope and severity. 

What’s more, tax fraud can be either a misdemeanor or felony depending on the act. Each has a range of both fines and jail time. In Massachusetts, the range includes:

  • Fines up to $100,000 for individuals
  • Fines up to $500,000 for corporations 
  • A prison sentence of up to five years
  • Being required to pay legal fees for the prosecution of the case

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