What happens if you are accused by the IRS, the FTB, or another California tax agency regarding omissions, fraud, or false information on a tax return? The short answer is simple: failure to make a full, transparent, and honest disclosure, or fraud and false information associated with a tax return, is considered to be a misrepresentation of income, which can and will result in civil and often criminal penalties. While civil offenses are easier for the tax agency to prove, serious offenders face significant financial penalties and even jail time.
Most Important Things to Know about Omissions, Fraud, or False Information on a Tax Return:
- It is the responsibility of every U.S. taxpayer to understand their responsibilities under the law and tax codes, and to file their tax return(s) on time, fully report all income earned worldwide, pay any taxes owed, and provide complete information that is accurate and truthful.
- The IRS and state tax authorities have much more sophisticated computer systems and AI to help identify inaccuracies, failure to make a full, accurate disclosure, and to identify targets for investigation and audit.
- Failure to make a full, timely, and accurate disclosure of all worldwide income exposes the U.S. taxpayer to substantial penalties, interest, fines, the expense of investigations and audits, as well as potential exposure to criminal penalties for willful conduct and tax evasion.
A Full, Accurate, and Timely Disclosure and Payment of All Associated Taxes
We’re not speaking about an honest mistake or a slight fudging of a number here or there. The IRS, FTB, and other state tax agencies have sophisticated computer systems and advanced AI tools that can quickly identify potentially fraudulent or inaccurate information and flag the return for an audit.
If an agency identifies what it believes to be a pattern, it can open the door to a multi-year audit. This is never good news and exposes the taxpayer to significant risk. If the agency believes you have made a substantial understatement of your income (the most common type of fraud or false information on a tax return today), the minimum penalty is usually 20% of the portion of the underpaid tax, in addition to the underpayment itself and accumulated interest.
Hiding income or assets, or failing to disclose income or assets such as foreign accounts or property on an FBAR (FinCEN Form 114) or IRS Form 8938, can be considered to be civil fraud. This is much more serious. The “I didn’t know…” defense will not suffice. The IRS and case law have clearly established that it is the responsibility of a U.S. taxpayer to fully understand their tax reporting responsibilities under the law and file accurate and timely tax returns. California and all U.S. state laws reflect these standards as well. If the IRS, California, or state tax agency has “clear and convincing” evidence that any part of the understated income was a fraudulent attempt to evade taxes, it becomes a civil violation carrying civil fraud penalties as much as 75% of the unpaid taxes assessed by the agency.
Ignorance of the Law Will Not Protect You From Omissions, Fraud, or False Information on a Tax Return
The IRS receives a trove of electronic information from foreign sovereign tax authorities, Foreign Financial Institutions (FFIs) such as banks and investment houses, specific foreign funds and investments, and even cryptocurrency exchanges and wallet providers. This information is tied to a specific U.S. Tax Identification Number (TIN), such as one's Social Security number. All the AI programs have to do is compare the information received to the return(s) of the taxpayer. Any discrepancies are immediately tagged for investigation, and often an immediate audit.
Don't be fooled by reports of budget and workforce cuts at the IRS. The primary source of IRS audits - under-reporting of income, omissions, fraud, or false information on a tax return - can be easily spotted and targeted by Artificial Intelligence. The agency still has all the resources needed to identify you, track you down, investigate you, audit you, and pursue all back taxes, fines, penalties, interest, and potential criminal charges for willful conduct or tax evasion.
If you are concerned about information from previous tax returns that may have inadvertently misrepresented or omitted sources of income, or have been contacted by the IRS, FTB, or another California or state tax agency regarding fraud or false information on a tax return, you need sound advice and counsel from a proven, experienced tax Attorney.
Look for an experienced tax attorney with decades of experience in domestic and international tax law, expatriate tax issues, foreign corporate ownership and offshore investments, and the Generally Accepted Accounting Principles (GAAP) that apply to U.S. tax returns. In some cases, it is simply a matter of helping the auditor to understand the complexities of accounting that underlie the return in question. The vast majority of auditors are not accountants.
In other cases, there are options to bring a taxpayer into compliance while reducing or mitigating their exposure to risk and financial consequences.
