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Understanding the IRS Fraud Investigation Process

Most IRS audits strive to resolve errors in a taxpayer’s return by requesting more detailed information. In some cases, however, an audit is the first step in a full-blown fraud investigation.

If you have received a notice from the IRS and face potential fraud charges, learn more about what to expect and how to protect your interests during this process.

Signs of impending fraud charges

A fraud investigation typically starts as a simple audit, and the taxpayer may be unaware that he or she is at risk for these charges. Often the first clue comes when you stop hearing from your auditor and an IRS attorney or representative from the criminal investigation division gets involved in your case.

Reasons for a fraud investigation

Some of the most common reasons the IRS investigates taxpayers for fraud include the following:

  • Exaggerated deductions
  • Omitted income
  • Hidden financial accounts
  • Missing information and forms
  • Transferred revenue and/or assets

The discrepancies must be significant and intentional for the IRS to pursue fraud or tax evasion charges. Tax fraud includes crimes such as the unreported sale of a business, not reporting an entire source of income such as a side business or hiding bank accounts and assets.

Penalties for income tax fraud

In addition to the personal and professional consequences of a criminal conviction, crimes against the IRS carry these penalties:

  • Tax evasion is a felony punishable by up to five years in prison. The maximum fine is $250,000 for an individual taxpayer or $500,000 for a corporation plus court costs.
  • False statements and fraud are felony convictions that carry up to three years in prison with the same fines as for tax evasion.
  • Failure to provide information, file a tax return or pay taxes count as misdemeanor offenses. You can receive up to a year in jail and fines of up to $100,000 plus court costs.

Talk to an experienced tax professional if you receive an unexpected notice from the IRS. You need legal advice about the best way to proceed in an investigation.

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