How to Report Tax Fraud


This sign in Burlington, North Carolina, advertises tax-refund-anticipation loans. Tax refund fraud by identity theft is endemic in the U.S. Thieves use matching names and Social Security numbers to get refunds of people they impersonate.
This sign in Burlington, North Carolina, advertises tax-refund-anticipation loans. Tax refund fraud by identity theft is endemic in the U.S. Thieves use matching names and Social Security numbers to get refunds of people they impersonate.
© Matt Maggio/Demotix/Corbis

Tax fraud is a serious problem in the United States. The Internal Revenue Service (IRS) reports only about 83 percent of both corporate and individual taxpayers pay what they owe each year, ripping off the government by some $450 billion in 2006 alone [source: IRS]. Third parties also get in on the action, crafting innumerable scams to cheat the government with your unwitting assistance. An example: A tax preparer bases her fee on a percentage of your refund amount, then falsifies your tax return so you receive a larger refund than you're due, which translates into more money for her. With about 60 percent of Americans using professionals to prepare their tax returns, this particular form of fraud is of much concern to the IRS [source: IRS].

Much of the fraud appears to be coming from a small group. According to the IRS Oversight Board's 2013 survey of taxpayer attitudes, only 12 percent of Americans say it's OK to cheat on your taxes. And the vast majority of Americans believe the IRS should vigorously enforce its tax laws on both low-income and high-income folks, plus small businesses and large corporations [source: U.S. Department of the Treasury].

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Before the government can prosecute anyone for tax fraud, though, it has to have proof. And that's often hard to obtain. So the government relies on its citizens to help by reporting any known or suspected tax fraud. Why stick out your neck like this? When people or corporations don't pay what they owe, the burden falls unfairly on everyone else. If tax cheats sent the U.S. government that $450 billion annual payment, for example, we might all be paying lower fees for certain governmental services, or have more money to spend on important things like education or America's aging infrastructure.

Because tax fraud is such an important issue, the IRS tries to make it easy for citizens to report suspected fraud. And if your tip pays dividends, you may even receive some cold hard cash.

Common Types of Tax Fraud

Former Detroit Mayor Kwame Kilpatrick was sentenced to 28 years in prison for racketeering, bribery, extortion, tax fraud and mail fraud.
Former Detroit Mayor Kwame Kilpatrick was sentenced to 28 years in prison for racketeering, bribery, extortion, tax fraud and mail fraud.
© REBECCA COOK/Reuters/Corbis

Unfortunately, there are loads of ways people and corporations can cheat the government out of its taxes. The IRS tells people to be on the lookout for people or businesses involved in things like kickbacks, faking exemptions or deductions, altering documents, failing to report income or not properly withholding taxes. It also issues an annual "Dirty Dozen" list of the year's most common forms of tax fraud. The 2013 Dirty Dozen list included:

  1. Identity theft: Someone steals your personal info and then uses it to commit tax fraud. A common tactic is to steal your identity, then file a tax return in your name and claim a refund.
  2. Phishing: Someone obtains personal or financial information via a fake website or email that appears legitimate. Once your identity is nabbed, it's used for tax fraud.
  3. Return preparer fraud: Tax preparers use your personal info to commit tax fraud or identity theft.
  4. Hiding income offshore: A person puts money in overseas accounts to avoid U.S. taxes.
  5. Scams involving Social Security or claiming IRS is giving out free money: Various schemes, with many targeting low-income individuals, the elderly and church communities.
  6. Impersonation of charitable organizations: Crooks create fake charities, often after major natural disasters, and obtain money and personal info from taxpayers, which is then used for tax fraud.
  7. False/inflated income and expenses: Taxpayer claims income he didn't earn or expenses he didn't pay.
  8. False form 1099 refund claim: A person files a fake supplementary return, such as 1099, to justify refund claim on corresponding tax return.
  9. Frivolous arguments: Filers don't pay what they owe for spurious reasons like federal income tax payment is optional.
  10. Falsely claiming zero wages: Filer rebuts the wages and taxes her employer reports paying her, or else files a fake supplementary return to bring her taxable income down to zero.
  11. Disguised corporation ownership: Creating corporations to disguise a business' true owner.
  12. Misuse of trusts: Transferring assets into a trust to avoid taxes.

Be aware of those trying to hook you into one of these schemes, because if you sign off on an erroneous return -- even unwittingly -- you're legally responsible [source: Internal Revenue Service].

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How Do You Report Tax Fraud?

The IRS wants people to report suspected tax cheats, so it's created various forms for you to fill out. Which form you fill out depends on the type of fraud you've witnessed -- unreported income, stolen identity or tax return preparer. The forms aren't long, but they do ask for specific details regarding the violations, plus information like the offender's Social Security number or employer identification number, if known. While you do need to divulge your identity to the IRS, the agency never shares your name with the person or business you're reporting. However, sometimes your identity will be obvious by the information you supply. And, if the case does go to trial, you might be summoned to testify [sources: Fontinelle, Internal Revenue Service].

Because it's difficult to convict someone of fraud, the IRS is mainly looking for serious infringers, not someone who failed to report the $70 she earned working at the county fair one night. And, as shown by the questions in the forms, you do need to have at least some credible evidence. Suspecting that someone or a particular company is cheating isn't good enough [source: Fontinelle].

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Once you submit a form alleging possible tax fraud, it has to pass several layers of investigation before the person or business is actually prosecuted. First, IRS special agents check over your information to see if they agree that criminal tax fraud or another financial crime may have been committed. If they think something looks fishy, a criminal investigation will be opened. Once an investigation is opened, evidence will be gathered. IRS investigators may interview people, conduct surveillance, subpoena bank records and review financial data.

When all of the evidence is gathered, investigators will again look over everything and decide if they want to pursue the case. If they do, they'll pass it on to the U.S. Department of Justice (DOJ) or the U.S. Attorney with a prosecution recommendation. If the DOJ or U.S. Attorney agrees to take on the case, it will be prosecuted [source: Internal Revenue Service].

Penalties and Rewards

Tax fraud doesn't go unpunished. Convicted defrauders face fines and prison time. The resulting penalties depend on the type of fraud committed. Someone convicted of willful failure to file a return, supply information or pay taxes, for example, can be thrown in jail for up to one year and face a fine of $100,000 (individuals) or $200,000 (corporations), plus court costs. If you're found guilty of conspiracy to defraud the United States, the possible jail time rises to five years and the penalties to $250,000 and $500,000 [source: IRS].

Keep in mind, though, that numerous fraud and related charges can be brought at once, resulting in much more time behind bars and stiffer penalties. When former Detroit mayor Kwame Kilpatrick was convicted of 24 counts of extortion, mail fraud, tax violations and racketeering in 2013, he was sentenced to 28 years in federal prison [source: The Federal Bureau of Investigation].

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To entice lawful taxpayers to assist in fingering defrauders, the U.S. has operated an informant program since 1867 [source: Internal Revenue Service]. Today, the program is run out of the IRS Whistleblower Office. If you report a person or business that's committed tax fraud, and the IRS uses your information to convict the person or business, you'll be eligible for up to 30 percent of the additional tax, penalty and other amounts collected by the IRS. In 2013, the Whistleblower Office paid $53 million to informants. The prior year, it shelled out $125 million [source: Internal Revenue Service].

Before you start salivating, remember that the IRS is looking for serious criminals. It doesn't want disgruntled individuals reporting ex-spouses or their former employers for petty reasons. (On the tax fraud form, you do have to sign that the info is true, under penalty of perjury.) Also, even if you finger a true criminal and the IRS makes a conviction, it can take years before the person is tried, convicted and you cash in. A total of 22,330 whistleblower claims from 2007 to 2013 were still open in 2014 [source: Internal Revenue Service].

But hopefully it's not all about the money. And if it is? Chances are if you're eligible for, say, a multimillion-dollar reward, you'll be willing to wait five or even 10 years to collect.

Author's Note: How to Report Tax Fraud

After learning how much scamming can occur by tax return preparers, I'm sure glad my husband is a CPA and prepares our own returns!

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Sources

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