When Does the IRS File Criminal Charges?

The IRS is the big scary entity that takes a look at everyone’s income statements every year around tax time. They cover the details of your fiscal year inside and out, and they determine whether or not you’ve done something wrong.

So if you have don’t something wrong, should you be scared of the IRS? The short answer is yes, but there are different types of getting in trouble with the IRS. You could be audited or criminally charged if things get bad enough for the IRS to take action.

So, When does the IRS take criminal action and file charges against you? Let’s take a look at the conditions and badges associated with the IRS criminal process.

IRS Criminal Charge Threshold

First thing’s first, it’s important to know that IRS investigates less than 2% of American taxpayers. Of that 2%, only 1 in 5 will receive criminal charges or fines. Those are some pretty low odds of getting persecuted for tax fraud.

On top of the low chances, you have to break an unofficial minimum of $70,000 of unpaid taxes to have an investigation opened. Even if an investigation is opened, the results will still come down to the determined intent of the missing money: is it neglect or is it fraud?  

What is the Difference Between Neglect and Fraud?

The IRS isn’t the monster waiting for the taxpayer who makes a mistake that it’s often viewed as today. As a matter of fact, it’s far more tolerant of honest mistakes than it used to be. Often times, the IRS will help taxpayers realize their mistakes and work with them to create a plan to repay what is owed. These are the cases that are ruled as Neglect.

Fraud is a different story entirely. Should they determine that you purposefully failed to report the large portions of income, you will ultimately face criminal charges for fraud.

How is Fraud Determined?

Fraud is defined with 4 different elements: deception, deliberate failure to file, misrepresenting material facts, and deliberately altering documents with false information. Normally it takes multiple elements being present for an investigation to be started by the IRS, but a blatant misuse of even one element can catch the eye of the IRS.

These areas of fraud are given badges as well. These bradget of fraud are split into 4 categories:

  1. Improper Income Reporting
  2. Unjustified Deductions or Tax Credits
  3. Inadequate Record Keeping
  4. Illegal Behavior

These 4 categories are determined through an investigation of 6 categories:

  1. Books and Records
  2. Expenses and Deductions
  3. Income
  4. Income Allocations
  5. Methods of Concealment
  6. Taxpayer Conduct

The need for an investigation can ultimately come down to your business or personal activity, and the manner you file your taxes. There are specific red flags called indicators of fraud that can spark the IRS’s interest in your returns. Generally, the indicators of fraud look like:

  • Consistent Underreporting of Income
  • Dealing Exclusively in Cash
  • Deliberate Destruction of Records
  • Deliberately Concealing Assets Like Overseas Tax Shelters
  • Fictitious Deductions
  • Illegal Activities
  • Indicators of Fraud
  • Maintaining “Shadow” Sets of Accounting Records
  • Maintaining Obviously Inadequate Records
  • Obviously Nonsensical Explanations for Behavior
  • Refusing to Cooperate with an Auditor or Examiner·
  • Understatement or Omission of Substantial Sums of Money

If you want to find more about how fraud is identified, you can read it all on the fraud page on the IRS Website.

So When Does The IRS Strike?

Realistically, the IRS won’t file criminal charges unless you make a major misstep and refuse to right your wrong. A lot of the time the IRS won’t strike unless you make them. If they have decided to press charges against you, you can always look into help from places offer tax defense teams. They can help you navigate the criminal charges, and guide you through the litigation process. It’s always nice having a team on your side when it comes to these situations.

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