Tax Lawyer's Blog

Tom Herman of the Wall Street Journal writes an interesting article titled How To Confess to Being a Tax Cheat and tells guilty-minded taxpayers what to do if they have a tax problem and are not an Obama Cabinet appointee.

First, he says, if you know you made a mistake on your tax return you may file an amended 1040 (download form 1040X) and voluntarily correct it.

This, of course, is what you should do.

However, it is rarely done in cases where the taxpayer made a mistake that is favorable to him or her.

Usually, taxpayers file amended returns to correct their returns and pay less tax.

Herman correctly points out that the odds of being audited are very low for most taxpayers and most will simply take their chances with the return as originally filed and not file an amended return to correct the error.

Some people may hope the best strategy is to play the “audit lottery”: lie low, say nothing and pray they won’t get caught. After all, the Internal Revenue Service audits only about one out of every 100 individual income-tax returns.

Depending on the nature and amount of the mistake, playing the audit lottery can be a very risky strategy for both the taxpayer and his tax preparer/advisor.

(You are not playing the audit lottery merely by taking a tax return position on which the law is not entirely clear.)

The truth is that the audit lottery tactic implies that you are knowingly filing (or failing to correct) a tax return that you believe to be inaccurate in the hopes that the IRS won’t catch you.

This is, of course, illegal, and if you do happen to get caught, the consequences are severe.

First, your case might be sent to the IRS’s Criminal Investigation Division (CID). These are the guys with badges and crew cuts who don’t play around.

Second, even if the case does not become a criminal one, you will open yourself up to a civil fraud penalty equal to 75% of the unpaid tax. The penalty is added to the tax and interest you owe.

Here’s what Herman suggests you should do if you haven’t filed your tax returns for several years or owe a substantial sum to the IRS in back taxes, interest and penalties:

Get help with filing those returns as quickly as possible, before you’re found out. If you can’t afford to pay what you owe, try to work out some kind of arrangement, such as paying on an installment basis. Depending on the circumstances, you might qualify for leniency under a “voluntary disclosure” agreement. Also check to see if your state is offering a tax amnesty.

And if there are potentially criminal implications:

If your offense is even more serious — such as fabricating deductions out of thin air or omitting income from illegal sources –- consider hiring a lawyer who specializes in criminal-tax issues and who can negotiate with the IRS for you.

And, finally, the best advice of all is to take the initiative and do something about the problem before the IRS makes you do something about it:

Whatever the case, beware of the ostrich approach of burying your head in the sand and hoping nobody will notice.

These days, it doesn’t take a presidential nomination to uncover tax wrongdoing.

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Tax Crimes and Criminal Referrals: What to Look Out For

As Tax Gap Widens Expect IRS to Get Tougher on Non-Compliers

Brace Yourselves Non-Filers and Delinquent Taxpayers: IRS to Target Non-Compliers

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