Try as you may to fill out your tax return correctly and ensure you paid your taxes, but you may still run into issues with audits and tax debts. Problems from the collection of unpaid taxes and the audit of your tax return can strike fear into many tax payers. With the resources below, you can learn about how audits work and what to do if it happens to you. You can also learn about what happens if you fail to pay, how tax collections work, how to go about appealing an IRS action, criminal tax evasion, and fraud.
An audit is a close review of a taxpayer's file by the IRS. An audit happens when there is suspicion of fraud or errors in paperwork, but they are also conducted randomly or target a group that is subject to greater scrutiny. Any audit should be taken very seriously. There are some tactics that can help avoid an audit and some considerations of your efforts fail and an audit takes place.
Some common causes of IRS audits include math errors, omitting income, claiming false business expenses, filing returns as "self-employed," statistical outliers, those fingered by a whistleblower, and those who belong to groups that have a high incidence of fraud such as small business owners. Apart from avoiding these red-flags a taxpayer can also reduce the visibility of their return by hiring a tax professional, preparing the taxes digitally (or at least neatly and carefully), and by filing on-time.
Tax Evasion and Fraud
There are fine distinctions between the avoidance of taxes, the evasion of taxes, and tax fraud. Fraud is the easiest to distinguish. Fraud occurs when taxes are avoided or reduced through misrepresentation. The IRS takes the position that it is not criminal to reduce, avoid or minimize personal income taxes by legitimate means. That is to say, avoiding taxes is different from evading taxes.
Avoidance of taxes does not involve concealing, lying, or otherwise misrepresenting facts from the IRS. Making a mistake is not criminal. Fraudulent or evasive activity requires an intentional act. Some activities commonly found to be fraudulent or criminal include deliberately underreporting income, hiding cash payments, using a false social security number, claiming exemptions you don't qualify for, creating false documentation, or claiming deductions falsely.
Tax Collections and Debt
The IRS has many options to pursue and collect debts. Initially the IRS will contact you by mail with a written notice of the amount owed. Interest and penalties accrue for as long as the debt is outstanding. The IRS may be willing to negotiate a compromise if you are unable to pay the debt in full. Monthly installment payments can be arranged. If you fail to negotiate an agreement the IRS may move forward with a collections process that can lead to liens, levies, and the seizure of future IRS tax refunds.
One of the most drastic actions the IRS can take is to seize your home or business. The Internal Revenue Service Restructuring and Reform Act of 1998 gave U.S. District Court Judges and Magistrates the power to take a home or business. Even before this legislation the IRS District Direct was already authorized to do the same.
In addition to seizure of a home or business the IRS is empowered to enforce collection through levy, seizure, and public sale of just about anything you own. Because of the IRS's broad authority and the serious consequences of nonpayment it is very important to reach a compromise or retain an attorney as early in the collections process as possible to reduce your exposure.