While those lavish business trips on your tax return are of concern to the Internal Revenue Service, failing to report income or avoiding filing taxes altogether are the biggest offenses that can land you in hot water. And small business owners are some of the most common offenders.
The IRS says 75 percent of those who cheat on their taxes are individual middle-income earners, while most others are businesses. From a babysitter to a restaurant, retail store or construction company, business owners are some of the most common tax evaders because they often are paid in cash for their services. And where there is no paper trail, there can be a chance for fraud, according to local attorneys. Unlike its credit and debit card counterparts that produce receipts, cash can be obtained without record and left reported on tax returns without a trace.
Still, local attorneys say tax fraud cases are uncommon. In fact, 15.5 percent are not complying with tax laws in some form and only about 2,000 people—or .0022 percent—of all taxpayers were convicted of tax crimes in a recent year, according to the IRS. If a tax reporting error is a conscious decision, then an individual or business potentially can be hit with a criminal fraud charge, or a lesser charge of civil fraud, explains Carl Markus of Paule, Camazine & Blumenthal. And Markus notes a criminal fraud penalty becomes increasingly serious as the amount of money becomes larger and the offense is repeated. But an unconscious mistake on a tax return may only equate to a negligence penalty, he adds. In the case of criminal fraud prosecution, a tax or criminal attorney can help communicate the defendant’s side of the story. “Hopefully he will be able to present it in a light that is not as damning,” Markus says. “There are usually two sides to every story.”
Overstating deductions—writing off a business, travel or entertainment expense such as a luxurious company trip—is another area of concern for the IRS. While unlawful, it is unlikely to bring about a tax fraud charge, Markus notes. “It’s a gray area that can be a matter of opinion.” Individuals or business owners may take a larger deduction than entitled under tax law—or, less commonly, make up deductions altogether. “Or they may take some personal expenses and claim it through their business,” says Bart Saettele of Paule, Camazine & Blumenthal. Inversely, individuals who are employed by a company are not likely to commit fraud because all of their income is reported on a W2 form, Markus says. The paperwork makes it easy for the IRS to check if an individual has not reported their income, or failed to file at all.
Another common place where tax issues arise is divorces, according to Craig Kallen of Kallen Law. As both spouses make claims on their taxes, some deductions are not allowed, or could be taken twice. Alimony is deductible, but property settlements are not, Kallen says. Additionally, children can be claimed by only one parent. While there are no tax implications with division of assets upon a divorce, Kallen notes couples should be aware of these other pitfalls.
Most non-filers are only charged with civil fines, while tax evasion and filing a false return are felonies, with a maximum prison sentence of five years and a maximum fine of $100,000. Local lawyers say the bottom line is to file your return in a timely manner and seek a trusted accountant or tax attorney for assistance.