Over the past several years, the IRS has put tax fraud investigations on the back burner. Statistics show a drop in criminal investigations and prosecutions in the past several years:
Recent developments at the IRS show that the days of ignoring tax fraud are over. In March 2020, the IRS declared that prosecuting tax fraud is now a high priority to the IRS. The agency established its Fraud Enforcement Office (FEO) – a new department at the IRS focused on seeking out tax cheats and abusive tax scheme promoters.
The FEO is the next big step by the IRS to increase the criminal prosecution of tax fraudsters. Most IRS enforcement actions originate form of the Small Business/Self-employed division who has both automated and local enforcement personnel focusing on audits, collection, and non-filing enforcement. SB/SE is currently led by the former IRS Criminal Investigation deputy chief, emphasizing the IRS priority to chase fraud.
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The new emphasis on fraud is not a concern to most taxpayers who are in good standing with the IRS and their taxes. However, the FEO has identified a focus on certain noncompliance groups of taxpayers involved in certain questionable transactions as taxpayers that are clearly on their early radar. For example, the IRS FEO has picked up the focus on certain targeted taxpayers, such as schemes related to syndicated conservation easements and micro-captive insurance arrangements. But most taxpayers are not involved in these traditional high wealth-related transactions.
The FEO has also identified more mainstream taxpayers and transactions that they are focusing on. These include:
High wealth taxpayers: The IRS has always audited high-wealth taxpayers more than other taxpayers, even during periods when the IRS’ audit resources were limited. Now, the IRS is looking closely at the rich taxpayers who have other businesses, like a related S corporation. Time will tell if the IRS finds more fraud patterns in these situations.
Non-filers: after years of not pursuing non-filers, both for civil and criminal enforcement, the IRS has refocused on the taxpayer who fails to file a required return. Several studies show taxpayers deliberating not filing a return. One study showed significant tax revenue lost, and potential tax fraud involved, for taxpayers who filed an extension to file (indicating they knew they needed to file) but never filed the required return. Non-filers beware- you are a target.
International taxpayers: years of asking taxpayers to voluntarily come back into the tax system and file all required returns and report foreign bank accounts are over. International taxpayers now face scrutiny and possible fraud investigations when they come back into the system or make a voluntary disclosure to the IRS. The moral of this story: international taxpayers should see their tax attorney before filing back returns or reporting past non-compliance to the IRS.
Questionable refunds: the IRS is focused on tax preparers and taxpayers involved in fraudulent methods to obtain refunds such as tax identity theft and earned income tax credit fraud. This has been an ongoing effort – with no end in sight.
Offer in compromise : the IRS recently put the OIC again on its “dirty dozen” tax scams list. The IRS will go after taxpayers and their representatives who make false financial disclosures in an attempt to settle their tax liability.
Employers not paying required employment taxes: non-payment of withheld federal payroll taxes has always been priority #1 for IRS Collection agents. The IRS is seeking more criminal prosecution of taxpayers who repeatedly withhold from their employees and evade payment of the taxes to the IRS. The IRS has also expanded their fraud investigations in this area to taxpayers who do not file required payroll returns.
Although IRS resources and compliance enforcement may be at an all-time low, the stakes are much higher for noncompliance. The IRS is now clearly focused on pursuing taxpayers for fraud- and this means the ultimate cost of noncompliance to the taxpayer can be severe. The days of the IRS looking the other way on fraud is over – agents will not be kinder and gentler if they decide to pursue fraud on a taxpayer.
In most cases, the taxpayer will not know if the IRS is pursuing fraud on a taxpayer. However, if you fall into one of the targeted taxpayers or transactions, or you are willfully attempting to evade reporting and paying your taxes, you should stand up and take notice – and get back into compliance before the IRS pursues you for tax fraud.
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