Topics:Tax Identity Theft
Guest Post by Kayla Matthews
The Internal Revenue Service (IRS) is the group responsible for investigating tax fraud instances allegedly committed by U.S. businesses or the country's citizens. Here's what you should know about that process:
The IRS maintains a dedicated page that walks people through how to report suspected tax fraud. The basic process is to mail the appropriate form, which prompts the IRS to look into the matter. When you believe an individual or business is not following tax laws, the associated document is typically called 3949-A Information Referral.
You can print the form off of the tax fraud reporting section of the IRS website or call a recorded hotline number listed there to request that a copy of the form be mailed to you. Bear in mind that you cannot make a tax fraud report through that number; the IRS only accepts written documents.
Instead of sending that form, you can send a letter that includes as much information as possible to help the organization assess the case. Include the following things:
The IRS allows submitting anonymous reports. However, it says that it's more helpful to them if you provide your identifying information. The IRS keeps the details confidential.
Based on the information contained in a report about alleged tax fraud, the IRS has internal teams that look into things further to determine the most appropriate actions to take. More specifically, the IRS has a division called Criminal Investigation (CI) that pursues cases of possible tax fraud and other financial-related crimes.
The IRS started screening for fraudulent tax returns in 1977. When the IRS has evidence suggesting fraudulent tax returns, the CI department of the IRS has eight Scheme Development Centers (SDCs) tasked with screening for tax refund fraud.
The staff at the SDCs also work with all other IRS departments during their checks. When people at the SDCs find problematic information, they refer cases to CI field offices and the investigators there. When the IRS contacts taxpayers for any reason, they always do so through the mail and never by phone.
A case of what appears to be tax fraud may not always come about because of intentional wrongdoing. For example, an accountant could make an honest mistake when preparing someone's tax returns, triggering an IRS audit.
For tax professionals, it is beneficial to stay abreast of tax law changes and participate in industry certification programs to avoid mistakes that cause fraud. In addition, it’s also helpful for taxpayers to know the red flags associated with illegal tax activity to avoid audits or serious cases of fraud.
The IRS has between 3–6 years to investigate tax fraud depending on the amount of underpaid tax. According to the CI's 2018 annual report, it identified $9.69 billion worth of tax fraud, issued 1,399 warrants and had a 91.7 percent conviction rate. Moreover, it initiated 1,714 tax crime investigations and recommended 1,050 prosecutions. On a related note, 1,052 parties received tax crime-related sentences.
However, many instances of tax fraud result in civil penalties rather than criminal prosecutions. Data collected in 2018 indicates that the IRS assessed nearly $29.3 billion in civil penalties. Almost $12 billion of that amount originated from individual tax returns or those related to estates and trusts.
Tax fraud cases often capture the headlines, but some people understandably wonder whether the overall problem of tax fraud is truly substantial or just overblown.
Firstly, keep in mind that the IRS tracks something called the tax gap — the difference between taxes owed and taxes paid. The IRS recently released its tax gap estimates and said that taxes get paid voluntarily and on time in 83.6 percent of cases, which is virtually unchanged from its last tax gap estimate.
The most current data is not as up to date as you may think, though. It covers 2011–2013, and the one before that dealt with 2008–2010. And, the percentage of taxes paid rose to 85.8 percent during both periods after the IRS proceeded with enforcements. However, the same report said that the tax gap grew by 11 percent compared to the last estimate, totaling $381 billion.
Additionally, a watchdog insists that the IRS is not efficiently combatting fraud associated with corporate mergers and acquisitions. A report released in September 2019 says the IRS spent 27,874 workdays looking into such matters from fiscal years 2015–2018 and did not make changes to the associated filings after completing their investigations.
Another study showed that the Criminal Investigation Unit pursued near 25 percent fewer cases than in 2010. Analysts cited budget cuts as a primary reason for the reduced enforcement.
Other variations exist that determine the prevalence of tax fraud. For example, evasion rates differ according to the type of taxes paid and the associated income bracket of a taxpayer.
Whether you file taxes, prepare them or are merely interested in tax fraud, the information here should prove useful. You also now know what to do if you need to report possible fraudulent incidents.
Kayla Matthews, a tech and security journalist, has written articles for sites including WIRED, Information Age, Security Boulevard, and the National Cyber Security Alliance. To see more of her work, follow her on Twitter @KaylaEMatthews or check out her tech blog, Productivity Bytes.
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