The Internal Revenue Service (IRS) is well-equipped to detect and prosecute individuals and entities who intentionally underreport income, overstate deductions or conceal assets. Behind every conviction lies a carefully constructed investigation.
The IRS combines audit techniques, whistleblower tips, forensic accounting and legal proceedings to catch tax evaders. By understanding how the IRS builds a case for tax evasion, individuals and entities can make informed decisions that safeguard their interests.
The power of whistleblower tips
One of the IRS’s most effective starting points for a tax evasion case is the Whistleblower Program. The program incentivizes insiders to come forward with credible information connected to tax evasion. If someone provides actionable intel that leads to the collection of unpaid taxes, they may receive a monetary reward of up to 30% of the amount recovered. These tips often include insider knowledge from former employees, business partners or accountants who have direct access to questionable financial practices.
Audits: The gateway to discovery
Audits are a key IRS tool in identifying discrepancies that suggest tax evasion. These reviews range from simple correspondence audits to in-depth field audits. To select individuals and businesses for auditing, the IRS uses:
- Data analytics
- Random sampling
- Red flags such as mismatched 1099
- Unreported income
- Inconsistent deductions
During an audit, taxpayers are required to provide detailed documentation. If the provided information fails to justify the reported figures, the IRS may escalate the matter, especially if patterns of deception are identified.
The role of forensic accountants
For complex or high-value cases, the IRS enlists the expertise of forensic accountants to dig deep into financial records to trace:
- Hidden income
- Fraudulent deductions
- Elaborate schemes designed to mask taxable earnings
They often reconstruct financial histories from bank statements, credit card records and lifestyle audits. Forensic accountants essentially compare known income to visible assets and expenditures.
Consequences of being found guilty
If found guilty of tax evasion, individuals may face:
- Up to five years in prison per count
- Substantial fines up to $250,000 for individuals (and $500,000 for corporations)
- The payment of back taxes with interest
In some cases, reputational damage and restrictions on business operations may follow.
For individuals or entities being audited or that suspect to be under investigation, it’s vital to consult a qualified tax fraud legal team immediately. IRS investigations can span years and involve thousands of documents. A knowledgeable legal team can help build a defense against potential charges. Schedule a free consultation by calling 877-627-1347 or reach out online.