We are talking about tax evasion, or the willful attempt to avoid paying a lawfully due tax. As a refresher from our last post, it’s a felony, and you can land in prison for as long as five years. The question, of course, is how the IRS figures out that someone has willfully declined to pay his taxes.
The answer is not easy. First, tax returns run through software programs that flag unusual or suspicious items. Trying to deduct as business expenses more than you earned, for example, would flag your return. The IRS will pull returns that come up with a certain number or a certain type of questionable entry. Then the audit starts.
What some people may not realize is that tax evasion and tax fraud in general encompasses a lot more than not writing the correct dollar amount on the check. Using a false Social Security number is fraud. Claiming a disability if you are not disabled or claiming a blind spouse as a dependent if you are not married is fraud. Making up a deduction or claiming you qualify for a tax credit when you do not — yes, that’s fraud, too.
We have all read about budget cuts at the IRS and the chances of an audit growing ever more remote, but there is still a chance. The likelihood of an audit resulting in criminal charges is remote, but there is a chance. And, perhaps more importantly, if the IRS starts to pay attention to someone’s financial dealings, you may attract the attention of other government agencies.
For example, the Department of Justice, for example, may start to look for evidence of illegal activities that would require money laundering. The Department of Health and Human Services may latch onto the green eyeshade of the auditors to look for Medicare fraud. And once the federal government has singled you out, the state of North Carolina will probably not be far behind.
There are a lot of reasons someone would decide not to pay his taxes. This isn’t just a crime of the rich. People with criminal records may find it hard to get work and may end up in low-paying jobs; their financial responsibilities may well exceed their income.
Our message, then, is that it is important, to understand the risk associated with avoiding a tax obligation. Remember, Al Capone went to prison for 11 years for tax evasion.
Source: NOLO.com, “Negligence Versus Tax Fraud: How the IRS Tells the Difference,” accessed Feb. 27, 2015