The IRS sent out more than 5 million math error notices to individuals, many of them having to do with the economic impact payment issued in 2020 and 2021. Optima CEO David King and Lead Tax Attorney Philip Hwang help explain what this notice means and provide guidance on what to do if one is received in the mail.
Tax evasion and fraud is not just a problem for white-collar crime criminals. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.
Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know the difference between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.
Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors; such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents- which is always a felony charge. This can extend to tax scammers will pose as a tax preparers and then rip off customers through refund fraud or identity theft. These phony accountants are committing Accountant Fraud and will tell you that they can get you a large tax refund and typically prey on low-income and non-English speaking taxpayers.
Take for example celebrity-convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.
The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.
The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.
There are some stipulations that can make those ten years spread out to an even longer period of time. Here are some reasons you may have an extended tax statute of limitations:
For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.
It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.
Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited; so they tend to focus their efforts on clear-cut cases.
Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions, if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.
Individuals that earned income throughout the tax year have the option to make non-deductible (after-tax) contributions to an IRA and benefit from tax-deferred growth. One of the most common risks that taxpayers take is paying additional taxes when withdrawing their money from their retirement accounts. Before making after-tax contributions to a traditional IRA, it is important for taxpayers to have an understanding of the rules and how to avoid the double tax trap on withdrawals.
There are certain contribution rules and limits that most taxpayers are not aware of with the IRA withdrawal process. Here are the rules taxpayers need to know about when making non-Roth after-tax IRA contributions:
Certain financial institutions where an IRA is kept could cause certain issues such as the institution restricting an individual to add more than $6,000 per tax year. Banks also do not track, report, or verify if an individual made a pre-tax or non-deductible IRA contribution. The responsibility is left up to the taxpayer.
For those who choose to make after-tax contributions to an IRA, are required to give the IRS a heads up that they have already paid taxes on those dollars by using Form 8606. Individuals who fail to report, track, and file the form will most likely lose the ability to shield part of their IRA withdrawal from a tax penalty when the money is withdrawn.
Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.
If you’ve received a notice from the IRS, you could be at risk of having IRS action taken against you. Some of the most common tactics that are used by the IRS is filing a tax lien or levying an individual’s assets. Optima CEO David King and Lead Tax Attorney Philip Hwang help taxpayers understand the difference between a lien and levy and how to stay on the IRS’ good side.
