Many people think they’re too small for the IRS to care about. There is some truth to that, but there are some risks you may not be aware of.
Who does the IRS audit?
The IRS tries to go after the most taxes owed. If one person owes $1 million and another owes $100, the government can make more money by going after the $1 million tax debt.
But doesn’t the IRS audit poor families the most? That’s true. The IRS does audit certain low-income tax payers at a higher rate.
The IRS doesn’t just look at the taxes owed but the cost. The cost to collect $100 owed on a simple tax return might be printing a letter, using a discounted stamp, and 15 minutes of an IRS agent’s time. When the IRS goes up against a big corporation, its lawyers and accountants might spend hundreds of hours and still potentially lose against the corporation’s lawyers in court.
So it’s not correct to say the IRS doesn’t care about low-dollar tax fraud or that it’s not worth them pursuing. This is especially true once you know how the IRS finds out about low-dollar tax fraud.
How does the IRS find out about low dollar tax fraud?
The IRS might know more about you than you think.
The biggest way the IRS catches unreported income is through 1099s. That’s why they’ve added Form 1099-K to monitor online transactions and recently reduced the reporting limit for that form.
If your income isn’t on a 1099, it does become harder for them to track. But if someone claims your income as a business expense, the IRS might notice you never reported it when checking their expenses. The IRS can also request your bank statements and other information in an audit.
The IRS can also cross reference against other tax data or government databases. For example, when you claim the Earned Income Tax Credit with dependents, the IRS can check their Social Security Numbers to see if they exist.
Another thing that can trigger an IRS audit is if your tax return is mathematically unusual. The IRS knows the average income and deductions for individuals and businesses in certain situations. If you’re in a business that usually has an 80% profit margin and claim yours was 40%, the IRS might take a closer look to find out why.
What does the IRS do about small tax fraud?
When the IRS notices someone underreported their taxes, they’ll usually send a CP2000 notice or similar tax notice. The notice might say one of two things:
- We think you calculated your taxes incorrectly owe more. Please pay or provide more information. This is most common.
- We’re auditing you. Please provide your documents by mail or come to our office.
For many people, the resulting tax penalties will be the end of it. The IRS gets paid and hopes the penalties are enough punishment to keep you from doing it again.
However, there is technically no minimum amount to get prosecuted for tax fraud. While the IRS does tend to only prosecute bigger cases because of the resources prosecution takes, any tax fraud could lead to potential criminal charges and jail time.
Can you get in trouble with the IRS for small mistakes?
The IRS doesn’t treat mistakes the same as fraud. There is no such thing as accidental tax fraud, so honest mistakes won’t get you charged with a crime.
What everyone has to worry about is IRS interest and penalties. You don’t want to get a letter saying you owe a few hundred or few thousand dollars from two or three years ago plus an even larger amount in interest and penalties.
In addition, if the IRS believes you aren’t making a reasonable effort to do your taxes properly, they might charge additional penalties or think you’re attempting tax fraud.
If you don’t do your taxes properly because you think you’re too small and the IRS doesn’t care about low-dollar tax fraud, you might be on track to get in serious trouble. If you make an honest mistake, you’ll have to pay for it, but it’s not the end of the world.
If you do think the IRS might be investingating you for tax fraud, keep in mind that this is a potential criminal charge. Contact a tax attorney as soon as possible.