One of the reasons most Texas residents file accurate tax returns each year is because the penalties for evading tax are severe. While this is true, relatively few Americans actually go to jail for failing to disclose all of their sources of income or claiming false deductions. The Internal Revenue Service audits more than half a million personal tax returns each year, but less than 1,500 of these audits lead to criminal charges for tax evasion.
What triggers a tax audit?
The IRS uses computer software to select the tax returns that are audited each year. Some returns are selected randomly, but most audits are triggered because the software notices inconsistencies or signs of tax fraud. Examples of audit red flags include 1099s from companies that made payments that do not appear on an individual return or from banks reporting interest payments that seem unusually large for a taxpayer’s claimed income.
When criminal tax investigations are launched, it is usually because taxpayers went to great lengths to hide income or lied to IRS officials or concealed documents during an audit. When this kind fraud is discovered, the penalties are usually harsh. Taxpayers who are found guilty of tax evasion are ordered to pay the tax they owe plus a 75% fraud penalty. They may also spend time behind bars.
Avoiding tax penalties
The best way to avoid penalties for tax fraud is to submit an accurate tax return before the April 15 filing deadline each year. Your return could still be selected for an audit if you do, but that is not something that you should worry about. If you are audited and you have underreported your income or exaggerated your deductions, you will probably not face criminal charges as long as you are honest and do not conceal documents during your audit.