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Taxes can be scary for many people. The system is not necessarily user friendly. While debtors' prisons are supposed to be a thing of the past, failing to abide by tax laws can result in criminal penalties, including fines and jail time.
To make matters even more complicated, in addition to federal tax laws, there are also state and local tax laws that can have just as harsh, if not harsher, penalties, as one California man recently learned.
Below, you'll find three common types of tax fraud.
1. Underreporting Income
Underreporting income is extraordinarily common for any person who is paid, or earns money, in cash form. However, this is a form of tax fraud and tax evasion and can result in serious criminal consequences. The IRS, and even state tax boards, require that all income be reported, which includes cash earned from the sale of goods, tips, and even casino winnings. Because there can often be little-to-no paper trail for industries where workers receive cash tips, or cash payments, oftentimes cash income will go unreported.
However, not all underreported income will rise to the level of criminality, at least under federal law. It is conceivable that some cash income received is not reported due to ordinary negligence or a genuine mistake. However, underreporting can be charged as a felony with penalties including a couple years behind bars, and up to $250K in fines.
2. Using Fake Numbers
Fudging numbers can result in serious criminal penalties for tax fraud. A person should never just guess, and should especially never knowingly use incorrect numbers, as it can be considered as making a false statement or falsifying a document. There are some checks and balances in place, some of which are computer automated, as well as specialized systems and tools, which can alert the IRS to inconsistencies.
It will be hard to prove the defense that using wrong dollar amounts was unintentional, particularly if the results weigh in your favor, and there is not a clear explanation on how it unintentionally occurred. Fudging numbers is likely to be charged as a felony, and carry a few year jail sentence and up to $250K in fines.
3. Claiming Unqualified Deductions
Another common act of tax fraud is claiming deductions, credits, and expenses, that an individual or business does not actually qualify for. Doing so can expose an individual to felony charges, a few years in jail, and the same hefty fines listed above.