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In most audits the IRS and California taxing authorities are only interested in collecting the taxes owed, plus interest and related late filing and/or payment penalties. However, if during the audit, the auditor suspects you may have committed tax fraud the taxing authority can assess a civil tax fraud penalty. The IRS civil tax fraud penalty is seventy-five percent of the tax owed. Worse yet, the auditor may ask a tax fraud specialist to review the case for possible referral for criminal tax fraud prosecution. Tax crimes include filing a false tax return, tax evasion, filing false documents, failure to collect employment taxes, failure to pay taxes, and failing to file a tax return.

The Difference Between Fraud and a Mistake

Generally, tax fraud or tax evasion involves an intentional wrongdoing. A mistake is not tax fraud. Carelessness is not tax fraud. The IRS and other taxing agencies look at the following “badges” to determine whether tax fraud is present:

  • Intentional and repeated understatement of income
  • Inadequate keeping of records
  • Failure to file tax returns
  • Implausible or inconsistent explanations of behavior
  • Concealment of assets
  • Failure to cooperate with taxing authorities
  • Engaging in illegal activities
  • Attempting to conceal illegal activities
  • Dealing in cash, and
  • Consistent failure to make estimated tax payments

If you have any of these tax problems and you are audited by the IRS or other taxing authority you may need to engage a tax attorney. Actions you take during the audit can turn a run of the mill tax audit into a tax fraud case. For example, lying or giving evasive answers, delaying tactics, and other actions designed to mislead the tax auditor are all indicia of tax fraud.

An experienced tax lawyer can help you navigate the treacherous waters of an audit and help formulate an effective strategy. Whether and when to answer questions from the taxing authority, or whether to stand on your Fifth Amendment rights, are questions only a tax lawyer familiar with representing taxpayers accused of civil or criminal tax fraud can answer. Your financial wellbeing, as well as your personal freedom may depend on the right answers.