How to Report Tax Fraud

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].

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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