What is Tax Fraud?

• Tax fraud occurs when a person willfully attempts to minimize tax liability by evading the tax law. Tax fraud is punishable criminally and civilly. Most tax fraud is committed by individuals who are self-employed or in cash businesses like waiters/waitresses, hairdressers, handymen, clothing store owners and even doctors and lawyers. The tax fraud that usually occurs in these types of businesses involves underreporting income or over-deducting business expenses. Other types of tax fraud include using a fake Social Security number, claiming a nonexistent dependent, or keeping two sets of financial ledgers.
  
  

Facts about Tax Fraud

• Although the IRS estimates that 17 percent of tax returns contain some type of fraud, usually only a small percentage of tax evaders are convicted. For instance, only 2,472 individuals were convicted in one year. That is only 0.0022 percent of all taxpayers. The IRS also estimates that individual taxpayers commit 75 percent of the tax fraud. The IRS projects that food servers routinely underreport their cash tips 84 percent of the time.
  
  

Negligence on Tax Return

• Negligence committed on a tax return is different from tax fraud. Tax fraud is a deliberate and willful act to defraud the government while negligence occurs when there are errors on a tax return. Tax auditors are aware that most taxpayers will make mistakes on their tax return, so the benefit of the doubt is usually given unless the mistakes indicate underlying fraud.
  
  

When Can a Debtor Eliminate a Tax Debt?

• Only federal income taxes are eligible for discharge under Chapter 7 bankruptcy. The debtor must meet the following conditions to discharge taxes:
  1.The debtor filed a legitimate (nonfraudulent) tax return for the relevant years;
  2.The tax liability on a tax return the debtor seeks to discharge was filed at least two years before filing for bankruptcy;
  3.The tax liability on a tax return the debtor seeks to discharge was due at least three years before debtor filed for bankruptcy; and
  4.The IRS did not assess the debtor's tax liability within 240 days before the debtor filed for bankruptcy.
  
  

When Tax Fraud Prevents Discharge under Chapter 7

• A debtor is required to file a legitimate tax return in order to eliminate federal income taxes in Chapter 7 bankruptcy. A legitimate tax return is a return that does not contain fraudulent information or a willful attempt to evade paying taxes. The discovery of fraud on a tax return will exclude a debtor's eligibility to eliminate tax debt under a Chapter 7 bankruptcy.