It's hard to believe it, but YES, people do cheat on their taxes!

It shouldn't come as a shock to hear it's a crime to cheat on your taxes. In a recent year, however, only 2,472 Americans were convicted of tax crimes — .0022 percent of all taxpayers. This number is astonishingly small, taking into account the fact that the IRS estimates that 17 percent of all taxpayers are not complying with the tax laws. And the number of convictions for tax crimes has decreased over the past decade.

According to the IRS, individual taxpayers do 75 percent of the cheating — mostly middle-income earners. Corporations do most of the rest. Cash-intensive businesses and service-industry workers, from handy-people to doctors, are the worst offenders. For example, the IRS claims that waiters and waitresses underreport their cash tips by an average of 84 percent.

How People Cheat on Their Taxes

Most people cheat by deliberately underreporting income. A government study found the bulk of the underreporting of income was done by self-employed restaurateurs, clothing-store owners and — you'll no doubt be shocked — car dealers. Telemarketers and salespeople came in next, followed by doctors, lawyers (heavens!), accountants (heavens again!), and hairdressers.

Self-employed taxpayers who over-deduct business-related expenses — such as car expenses — came in a distant second on the cheaters hit parade. Surprisingly, the IRS has concluded that only 6.8 percent of deductions are overstated or just plain phony.

If you are caught cheating by an auditor, they can either slap you with a civil penalty or worse, refer your case to the IRS' criminal investigation division.

Auditors are trained to look for tax fraud — a willful act done with the intent to defraud the IRS — that dark area beyond honest mistakes. Using a false Social Security number, keeping two sets of financial books, or claiming a blind spouse as a dependent when you are single, are all examples of tax fraud. While auditors are trained to look for fraud, however, they do not routinely suspect it. They know the tax law is complex and expect to find a few errors in every tax return. They will give you the benefit of the doubt most of the time and not go after you for tax fraud.

Fraud or Negligence?

A careless mistake on your tax return might tack on a 20 percent penalty to your tax bill. While not good, this sure beats the cost of tax fraud — a 75 percent civil penalty. The line between negligence and fraud is not always clear, however, even to the IRS and the courts.

While auditors aren't detectives, they are trained to spot common types of wrongdoing, called badges of fraud. Examples include a business without any records at all, or freshly made false receipts and checks altered to increase deductions. Altered checks are easy to spot by comparing written numbers with computer coding on the check or bank statements.

While the statistical likelihood of your being convicted of a tax crime is almost nil, it does happen to some folks. If you are in the unlucky minority, hire the best tax and/or criminal lawyer you can find.

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This page last modified: 15 Mar 2008