Most successful professionals and small business owners want to minimize their tax obligations. The appropriate use of write-offs and exemptions can significantly reduce someone’s state and federal income tax obligations.
However, the creative accounting that people sometimes use when preparing their tax returns may cross the line and become tax evasion or tax fraud. When either the Internal Revenue Service (IRS) notifies you of suspected tax fraud or you receive similar notice from Connecticut state authorities, what penalties might you face?
The federal tax fraud penalties
The IRS is notorious for imposing strict fines and significant interest. You will need to make arrangements to pay those costs and the past due amount of taxes or risk prosecution and of slowly growing balance on the taxes due.
Those accused of income tax fraud could face both federal prosecution and civil penalties. A conviction could mean up to five years in federal custody and financial penalties. The IRS can assess a massive fine for tax fraud. Individuals may need to pay as much as $250,000 in fines, while corporations could face fines of as much as $500,000.
If the IRS alleges you committed civil tax fraud, not criminal fraud, you may have to worry about fines and penalties of as much as 75% of the amount unpaid, but no jail. In some scenarios, the IRS may choose to pursue both civil and criminal claims against you.
The Connecticut state penalties
The state can hold you accountable by assessing a financial penalty, which can be as much as the total amount of taxes you didn’t pay. You may also have to pay an additional fine of up to $1,000. If the state claims you intentionally submitted inaccurate information and failed to pay your income taxes, the fine could increase to $5,000. The penalties could also include up to five years in state custody.
Those who make mistakes on their federal income tax return will almost certainly carry over some of those mistakes onto their state return paperwork. Connecticut may assess its own penalties in addition to whatever the IRS expects you to pay.
Learning about the consequences of tax fraud allegations could help you determine the best response to those charges.