Making an honest mistake on your taxes (like miscalculating) or being negligent (like failing to keep records) could potentially just incur a penalty. Still, tax fraud differs, as it is intentionally done by the taxpayer to illegally pay less money than they actually owe. Normally, you owe income taxes on the money you earn, aside from adjustments like credits and deductions. But someone committing tax fraud might knowingly try to hide some of their income or assets in an effort to pay less tax. When you commit tax fraud, you could be prosecuted. In civil fraud cases, the government might try to collect the correct amount of tax owed plus penalties. But those who commit tax fraud can also face criminal prosecution. That can mean fines and/or potentially even going to prison for tax fraud.
Example of Tax Fraud
Someone committing tax fraud might keep a secret bank account and only report earnings that go into a known bank account. Or, to deceive tax agencies, a business owner might try to reduce their taxable income by claiming they paid $50,000 in advertising expenses when really they only paid $5,000.
What Tax Fraud Means for Individuals
Tax fraud is a serious issue, not only for moral reasons regarding paying your fair share of taxes but also because it is illegal. If you try to deceive the IRS or other tax agencies, you could face significant penalties or even go to prison. Keep in mind that trying to pay less than what you legally owe is very different from making legal, strategic tax-reduction decisions, like maximizing retirement contributions to tax-deductible accounts. So when it’s time to do your taxes, you may want to work with a tax professional or use tax software that can help you find as many legal tax deductions and tax credits as possible. But avoid working with someone who encourages you to do something fraudulent, like underreporting your income.
