According to the Internal Revenue Service, any person who wilfully attempts to evade paying taxes is guilty of fraud. Evidence of fraud, such as dealing in cash, misrepresentation of tax information, or the use of fake documents, is used to initiate a fraud investigation. If an IRS criminal investigator determines that there is tax owed due to fraud, then there are variety of penalties that IRS can impose.
In many cases, IRS will disallow you from the benefit of certain credits if you are guilty of fraudulently claiming the credit. For example, individuals who are determined to have fraudulently claim the Earned Income Credit (EIC) cannot claim the credit again for another ten years.
If IRS determines that you underpaid your tax due to fraud, then you will be charged a penalty of 75% of the underpaid tax. There are additional accuracy related penalties – such as for negligence or disregard for rules – for which a 20% fee can be charged. Those penalties, however, are not directly related to fraud.
Interest accrues on any underpayment of tax. If you are found to owe tax due to a fraudulently filed return, or to fraudulent information listed on the return, then interest will be added to the underpaid tax. The penalty that will most likely be assessed to your balance due is the failure-to-pay penalty. The failure-to-pay penalty is 0.5 per cent of the unpaid tax, for each month the tax is due.
Individuals who are found guilty of fraud face penalties of up to £162,500, and businesses face fines of up to £325,000. In addition to these fines, if you are found guilty of income-tax fraud, you may also be charged the cost of prosecuting your case.
Those who are convicted of income-tax fraud may be sentenced to prison. That determination will depend on the severity of the fraud as well as the strength of the evidence. The evidence must be clear and convincing and prove that the taxpayer's intent was to defraud the government. IRS Statutes 26 and 18 – which refer directly to fraud – do not recommend prison sentences in excess of three to five years.