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Tax Evasion, Fraud & the Statute of Limitations on Tax Crimes

Tax evasion and fraud is not just a problem for white-collar crime masterminds. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.

Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know what the difference is between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.

Tax Evasion vs. Tax Fraud

Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors, such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents and is always a felony charge.

Take for example celebrity-convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.

What’s the Statute of Limitations for Tax Evasion or Tax Fraud?

The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.

The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.

For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.

It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.

Tax Crime Statistics

Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited; so they tend to focus their efforts on clear-cut cases.

Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions, if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.

IRS Audit Red Flags to look out for

The IRS has the ability to audit an individual’s tax return to ensure that there is not any fraudulent activity occurring. A general rule is that the IRS can go back at least three years for an audit; however, if there are major errors on your return, the agency does have the ability to go back another few years – but typically no more than the last six years.

If you are being audited, the most important thing to remember is that you will need to have solid documentation to back up any claims you make about your overall financial picture, particularly your deductions.

Here is a list of additional items that could get your return flagged by the IRS:

  • Claiming a home office deduction. Taxpayers are required to have a dedicated space in their home that is strictly used only for their business in order to take advantage of this type of deduction. This deduction allows an individual to prorate some of their household expenses such as utility bills, homeowner’s association fees and more on a fractional basis. When claiming this deduction, an individual will need to figure out how much square footage is dedicated to their business in their home versus how much square footage they have in their home at large.
  • Deducting unreimbursed business expenses. Unreimbursed business expenses are only deductible beyond 2% of your adjusted gross income. Most workers are also reimbursed by their employers for most out of pocket expenses. Expenses such as license fees, subscriptions to trade journals, tools and supplies, and specialty uniforms are deductible expenses. Non-allowable deductions such as commuting costs and everyday work clothes should not be placed on your tax return and could trigger an audit with the IRS. This could end up being very costly for an individual if the IRS rejects your deductions.
  • Claiming 100% business use of a vehicle. Taxpayers should consider keeping a paper log on their dashboard and writing down every mile that is used for work, the date and what it was for. If you do want to claim all the costs for a business expense, be sure you have another vehicle too.
  • Hiring a preparer who falsifies your return without your knowledge. Taxpayers should be cautious when hiring a tax preparer. There are many incompetent and unethical tax preparers who could end up costing you more than you expected. If the IRS sees a pattern of problems on your returns coming from one preparer, they may flag the entire operation’s returns for that year or the past several years. If an egregious error is found on your return, you will most likely be held accountable for it.
  • Taking an alimony deduction. Alimony is paid under divorce agreements and after the 2018 tax year, is no longer deductible. In addition, ex-spouses get taxed on alimony received under post-2018 divorce agreements. Individuals that attempt to deduct their alimony expense will likely trigger an audit with the IRS if there is a mismatch in reporting by the payer and the recipient of alimony on each of their tax returns

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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What to Expect When You Call the IRS

Individuals seeking assistance from the IRS may be wondering if they have the option to contact the agency and what they should expect when speaking with an IRS agent. Whether you received a tax notice and are seeking more information on it, or you are looking to set up a payment agreement, here is everything you need to know before calling the IRS. 

Do not reach out to the IRS if you have tax questions or need assistance filing your tax return. Taxpayers should not waste their time waiting on hold trying to reach an agent to discuss any questions or concerns they have about filing their taxes. Instead, it is recommended to seek out assistance from a tax professional that can address any tax filing questions you have about your return and how to file it once it has been prepared.  

The IRS also has interactive tools on their website that can be used to provide updates on the status of a tax return or find out the status of a refund. The IRS has even established a portal for taxpayers to use when checking on their stimulus check status. 

Taxpayers should contact the IRS if they owe a tax balance but cannot pay the amount in full, if they are being audited, or if they have received correspondence from the IRS requesting them to call in. 

 Individuals who are unable to afford paying off their tax balance have the option to work with the IRS to establish a payment plan or apply for an offer for tax debt forgiveness. Taxpayers who are being audited should also reach out to the IRS to discuss their situation and should also get their tax preparer involved just in case additional information needs to be provided.  

When contacting the IRS, be prepared to verify your identity and your accounts. Taxpayers should have their name, date of birth, and social security number ready. If you are calling on behalf of someone else, you will need to provide proof of a power of attorney that shows you have permission and authority to do so. 

Once an IRS agent has verified your identity, you should have the following forms on hand for reference: 

  • Your completed tax return. 
  • Your EIN or Taxpayer Identification number. 
  • Proof of past payments if you have made quarterly payments or put money toward a debt to the IRS. 

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Don’t get Taxed twice when making Non-Deductible IRA Contributions

Individuals that earned income throughout the tax year have the option to make non-deductible (after-tax) contributions to an IRA and benefit from tax-deferred growth. One of the most common risks that taxpayers take is paying additional taxes when withdrawing their money from their retirement accounts. Before making after-tax contributions to a traditional IRA, it is important for taxpayers to have an understanding of the rules and how to avoid the double tax trap on withdrawals.

There are certain contribution rules and limits that most taxpayers are not aware of with the IRA withdrawal process. Here are the rules taxpayers need to know about when making non-Roth after-tax IRA contributions:

  • Individuals are required to have earned an income.
  • The deductibility phase-out is determined on the filing status, income, and whether or not an individual is eligible to participate in a retirement plan at work.
  • Contribution limits are the lesser of: $6,000 (plus $1,000 if age 50+) or earned income and apply to aggregate additions to IRAs.

Certain financial institutions where an IRA is kept could cause certain issues such as the institution restricting an individual to add more than $6,000 per tax year. Banks also do not track, report, or verify if an individual made a pre-tax or non-deductible IRA contribution. The responsibility is left up to the taxpayer.

For those who choose to make after-tax contributions to an IRA, are required to give the IRS a heads up that they have already paid taxes on those dollars by using Form 8606. Individuals who fail to report, track, and file the form will most likely lose the ability to shield part of their IRA withdrawal from a tax penalty when the money is withdrawn.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Tax moves to consider before paying for College

Individuals who have children going to school very soon or who recently had children and are looking to prepare for their college in advance, need to find strategic ways that they can reduce their taxes and also help with the college costs.

Parents should consider opening up a 529 plan and also review tax credits as well as other strategies they can use in order to ease the burden of high education costs. Here is what taxpayers need to know before opening a 529 plan.

  • Families that invest in a 529 college savings plan could have the option to utilize their tax-deferred funds. In order to avoid any levies, they will need to use these funds for qualified education expenses such as tuition fees, books, room and board, computers and much more.
  • Those investing in a 529 family plan should first start off by adding up their qualified expenses and subtracting tax-free education assistance. Families should also see if they qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit (both are subject to income limits).
  • The American Opportunity Tax Credit applies to the first four years of higher education, the Lifetime Learning Credit typically pays for undergraduate, graduate, or professional degrees.
  • There is one downside to the non-parental 529 plan that taxpayers should be aware of. The withdrawals from this plan may be counted as a student’s income on the next year’s Free Application for Federal Student Aid, or FASFA, which may affect any financial aid that a student is receiving.

 Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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What’s the difference between a Tax Lien and Levy?

If you’ve received a notice from the IRS, you could be at risk of having IRS action taken against you. Some of the most common tactics that are used by the IRS is filing a tax lien or levying an individual’s assets. Optima CEO David King and Lead Tax Attorney Philip Hwang help taxpayers understand the difference between a lien and levy and how to stay on the IRS’ good side.   

Confused or scared by an IRS notice? Download the Optima®TAX APP and easily understand the severity of your tax situation.

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University students and staff should be aware of IRS Impersonation Email Scams

With the start of another school year just around the corner, the IRS has started warning individuals to be on the lookout for IRS-impersonation scams that primarily target educational institutions, students and staff who have a “.edu” email address. The IRS has recently been notified via their phishing@irs.gov email about impersonation scams from people with the “.edu” email.

The phishing emails seem to be targeting universities and college students from public, private, profit and non-profit institutions. These fraudulent emails typically display the IRS logo and will use a variety of subject lines such as “Tax Refund Payment” or “Recalculation of your tax refund payment.” These emails will attempt to persuade people to click a link and submit a form in order to claim their refund.

Taxpayers can protect themselves against scammers by recognizing the signs of what a phishing email typically contains:

  • Social Security number
  • First Name
  • Last Name
  • Date of Birth
  • Prior Year Annual Gross Income (AGI)
  • Driver’s License Number
  • Current Address
  • City
  • State/U.S. Territory
  • ZIP Code/Postal Code
  • Electronic Filing PIN

Should an individual receive a scam email, they should avoid clicking on the link in the email and immediately report it to the IRS. For security reasons, individuals should save the email and send the attachment to phishing@irs.gov.

Taxpayers who believe they provided their personal information over to identity thieves should consider obtaining an Identity Protection PIN. Taxpayers have the option to opt into the program and will be provided an IP PIN that will contain a six-digit number that will help prevent identity thieves from filing fraudulent tax returns in the victim’s name.

Taxpayers who attempt to e-file their tax return and find it rejected because a return with their SSN already has been filed should file a Form 14039, Identity Theft Affidavit PDF, to report themselves as a possible identity theft victim.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Common Myths about Federal Tax Refunds

With the tax deadline now in the past, the IRS reminds taxpayers that there is no faster way to get a refund and to be patient while they process recently filed returns. Taxpayers who have already filed their federal tax return should have received their tax refund. Those who have yet to receive their refund should be aware that there is no faster way to get it. When it comes to tax refunds, here are a few common myths that individuals should know.

Before looking at common myths about refunds, taxpayers will need to understand a few key facts about the refund process:

  • Taxpayers who choose to file electronically and use direct deposit can expect their refund faster than those who mail a paper return.
  • Taxpayers who file a paper tax return are likely to face processing and refund delays.
  • The best and easiest way to check on a refund is Where’s My Refund?
  • The Where’s My Refund? tool available on IRS.gov and the IRS2Go mobile app.
  • A tax refund’s status can be checked within 24 hours after the taxpayer receives the e-file acceptance notification.

Here are a few common myths taxpayers should be on the lookout for:

Individuals who received a refund will most likely not need to adjust their withholding. However, if a taxpayer has experienced a change in income, they should review their current withholding and adjust it accordingly to ensure that they do not have to experience any tax time surprises for the next tax season.

Attempting to call the IRS or tax professional

Taxpayers should be aware that contacting an IRS agent or tax professional will not expedite their refund process and they will not receive any “special” information.

Utilize the Where’s my Refund? tool to track your refund

The Where’s My Refund? tool on the IRS website allows individuals to track the status of their refund. The tool will allow people to review whether or not their return is processing. Taxpayers should be aware that some tax returns may take longer to process if it requires further review. This includes:

  • Errors.
  • The return is incomplete.
  • Is affected by identity theft or fraud.
  • Includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process.

Your tax refund is less than expected

There are many reasons as to why a tax refund may be different than expected including:

  • Includes errors.
  • Is incomplete.
  • Is affected by identity theft or fraud.
  • Includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process.

If your refund amount is less than expected, the IRS will mail a notice explaining why the adjustments were made. Some taxpayers may even receive a letter from the Department of Treasury’s Bureau of the Fiscal Service if their refund was reduced to offset certain financial obligations.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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How long can the IRS Audit my Taxes?

For most taxpayers, the worst thing that can happen after filing their taxes is having the IRS notify them that their tax return is being audited. What most people do not realize is that there is a time frame for how long the IRS can audit an individual and that taxpayers have a right to dispute an audit if they have proper substantiation. Here is everything you need to know if you are going through an audit.

Typically, the IRS has about three years from the date that a tax return was filed to charge you or assess additional taxes. The three-year timeframe is called the assessment statute of limitations. Tax returns that are flagged typically end up going into audit or the individual will receive notification from the IRS stating that some information on their return was underreported. This notice is called a CP2000.

The IRS procedural policy states that an IRS agent will be required to open and close an audit within 26 months after a tax return has been filed. The IRS strictly adheres to its guidelines to ensure that the audit and other processing needs are complete within the three-year timeframe.

For audits that start a few months after a return is filed, the IRS will typically freeze any refunds. The IRS will have to pay interest on refunds that are sent out late, which is why the IRS will attempt to resolve its audit quickly. Once a taxpayer answers the questions regarding their tax return with accuracy, then their refund will be released and sent out.

Audits that happen immediately after filing a tax return typically contain tax credits, earned income tax credits and the child tax credit. The IRS usually wants to verify the filing status, dependents, and other return items before sending your refund.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Can you Stop a Tax Lien?

Individuals who fail to file their tax returns or pay off their tax liability with the IRS are at risk of having a federal tax lien filed against them. Optima CEO David King and Lead Tax Attorney Philip Hwang discuss options a taxpayer has in order to mitigate the impact of a tax lien being filed by the IRS.

Got an IRS Notice? Get a FREE Risk Review with our Optima® TAX APP with Notice Analyzer

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