An IRS Investigator Dishes on Small Business Tax Fraud

kathryn by Kathryn Hawkins on February 10, 2011
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Worried about what the IRS will find if you’re selected for an audit? If you’ve neglected to declare earned income, paid contractors under the table, or made a mistake on your tax returns, you may find yourself looking at hefty fines — or, in some cases, even jail time.

In this story, Al Rucker, a recently retired IRS criminal investigator, shares his tips on how small business owners can stay in the IRS’s good graces.

ISBB: In your time with the IRS, how could you tell when someone was providing fraudulent returns? What were the biggest red flags?

Rucker: Generally, income that was not commensurate with expenses.  Concealment of assets is the number one fraudulent act.  Lifestyle far exceeds reported income.  Red flags include two sets of books and records, destruction of books and records, false or altered entries in books and records, false invoices or billings, photocopies of invoices, and excessive billing discounts, among others.

What are the penalties for not declaring income?

It depends on intent.  If the IRS can prove intent, or bad purpose, the fraud might have criminal implications (imprisonment, fines).  If the incident lacks intent or is less than 10 thousand dollars or so in underpaid tax, civil penalties, as well as a civil fraud penalty, may instead be applied. The IRS lists penalties for various tax fraud offenses on its official website. Most of the time, criminal investigations turn up thousands of dollars in unreported tax (not income) spanning several years.

What unintentional mistakes do business owners make on tax returns that could get them in trouble with the IRS? What do they need to be aware of?

Unintentional mistakes may result in civil penalties being applied once the underpayment is determined.  It is not as much trouble as it is expensive.  Interest will always date back to the original filing date.  Other penalties may be applied, such as failure to pay or failure to make estimates, depending on the circumstance.  Penalties are often abated with reasonable justification, but interest is never abated.

Check as well as possible and file a truthful, accurate return.  Regardless of who prepares your return, the taxpayer (or business owner) is still responsible for what appears on the return. Do not simply trust the accountant or return preparer.  Review the return prior to filing.

Remember that the interest and penalties compound rapidly. Taking a “let them catch me” approach will be very costly in the long run.

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