Tax fraud refers to the willful attempt by individuals, businesses, or other entities to evade or defraud tax authorities by misreporting information on their tax returns. This can involve underreporting income, inflating deductions, or failing to file tax returns altogether. Tax fraud is a serious offense under both federal and state law, and those caught engaging in fraudulent activities can face steep penalties, including fines and imprisonment.
Tax fraud is distinct from tax avoidance, which refers to legally using tax laws to reduce one’s tax liability. Fraud, however, involves deceit and illegal actions taken to avoid paying taxes. In most cases, tax fraud requires intent, meaning that the taxpayer knowingly and deliberately engaged in the fraudulent activity.
The Internal Revenue Service (IRS) and state tax authorities are responsible for investigating and prosecuting tax fraud. While federal law governs much of the tax system in the U.S., many states have their own specific laws and penalties related to tax fraud. This article outlines tax fraud charges and penalties by state, highlighting how these laws can differ from one jurisdiction to another.
Tax Fraud Laws
In the U.S., tax fraud laws are established by both federal and state governments. On the federal level, the IRS takes tax fraud seriously, using a range of penalties, including criminal prosecution, for those who attempt to evade taxes. Section 7201 of the Internal Revenue Code outlines penalties for tax evasion, stating that anyone who attempts to defeat or evade taxes can face up to five years in prison and fines up to $100,000 for individuals and $500,000 for corporations.
The government must prove that the taxpayer knowingly committed fraud. For example, mistakes on a tax return due to negligence or lack of knowledge are usually considered civil tax issues, not fraud. However, if the taxpayer took deliberate steps to avoid paying taxes, such as creating false documents or hiding income, they may be prosecuted for tax fraud.
Each state also has its own tax fraud laws. These laws vary widely, with some states imposing harsher penalties than others. States work alongside the federal government to ensure compliance with tax laws and to prosecute offenders who engage in fraudulent activities.
Tax Fraud Sentencing Guidelines
Tax fraud penalties depend on the severity of the offense and whether it is prosecuted at the state or federal level. In addition to prison time and fines, taxpayers found guilty of fraud may be required to pay restitution to the government for unpaid taxes, interest, and additional penalties. The IRS often assesses a 75% fraud penalty on unpaid taxes if a taxpayer is found guilty of civil fraud.
Criminal charges are typically reserved for the most severe cases of tax fraud. Convictions for criminal tax fraud can result in significant jail time, with federal penalties reaching up to five years in prison per offense. Many state laws follow similar guidelines, with varying maximum prison terms and fines.
Tax Fraud Cases
Some examples of tax fraud that have been prosecuted by the IRS and state tax authorities include:
- Underreporting income by failing to report all earnings from self-employment or side jobs.
- Inflating deductions, such as falsely claiming charitable donations or business expenses.
- Failing to file tax returns altogether, especially if substantial income is involved.
- Claiming false dependents or fabricating information to receive larger tax credits.
One of the most high-profile tax fraud cases involved Wesley Snipes, the Hollywood actor. In 2008, Snipes was convicted of three misdemeanor counts for willfully failing to file tax returns from 1999 to 2001. He was sentenced to three years in prison and ordered to pay back taxes, interest, and penalties to the IRS.
Tax Fraud News
- Tax Shelter Promoter Pleads Guilty to Tax Fraud – In 2023, a tax shelter promoter pleaded guilty to conspiring to defraud the IRS by promoting abusive tax shelters.
- IRS Criminal Investigation Annual Report – The IRS released its annual report detailing its efforts to investigate and prosecute tax fraud, resulting in billions of dollars in recovered taxes and penalties.
- Major Tax Fraud Case Settled in California – A tax fraud case in California involved a major corporation that attempted to evade millions in state taxes.
Tax Fraud Laws By State
Tax fraud laws are designed to prevent individuals and businesses from evading taxes, but the laws and penalties vary significantly by each state:
Alabama
Under Code of Alabama Section 40-29-110:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Alaska
Under Alaska Stat. Section 43.05.290:
- Tax fraud can lead to fines up to $250,000 and imprisonment for up to five years.
Arizona
Under A.R.S. Section 42-1127:
- Tax fraud is a felony with penalties including fines up to $150,000 and imprisonment for up to five years.
Arkansas
Under Ark. Code Ann. Section 26-18-201:
- Tax fraud violations can result in fines up to $10,000 and imprisonment for up to six years.
California
Under California Revenue and Taxation Code Section 19706:
- Tax fraud can lead to fines up to $50,000 and imprisonment for up to three years.
Colorado
Under Colo. Rev. Stat. Section 39-21-118:
- Tax fraud can result in fines up to $500,000 and imprisonment for up to six years.
Connecticut
Under Connecticut General Statutes Section 12-737:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Delaware
Under Title 30, Section 573:
- Tax fraud can result in fines up to $50,000 and imprisonment for up to three years.
Florida
Under Florida Statutes Section 775.082:
- Tax fraud can lead to fines up to $10,000 and imprisonment for up to five years.
Georgia
Under Georgia Code Section 48-7-124:
- Tax fraud is a felony with penalties including fines up to $100,000 and imprisonment for up to five years.
Hawaii
Under Hawaii Revised Statutes Section 231-36:
- Tax fraud violations can result in fines up to $100,000 and imprisonment for up to five years.
Idaho
Under Idaho Code Section 63-3068:
- Tax fraud can lead to fines up to $10,000 and imprisonment for up to three years.
Illinois
Under Illinois Compiled Statutes 35 ILCS 5/1301:
- Tax fraud is a felony with penalties including fines up to $25,000 and imprisonment for up to three years.
Indiana
Under Indiana Code Section 6-8.1-10-5:
- Tax fraud violations can result in fines up to $100,000 and imprisonment for up to five years.
Iowa
Under Iowa Code Section 421.27:
- Tax fraud can lead to fines up to $75,000 and imprisonment for up to five years.
Kansas
Under Kansas Statutes Section 79-32,264:
- Tax fraud is a felony with penalties including fines up to $100,000 and imprisonment for up to five years.
Kentucky
Under Kentucky Revised Statutes Section 131.630:
- Tax fraud violations can lead to fines up to $50,000 and imprisonment for up to five years.
Louisiana
Under Louisiana Revised Statutes Section 47:1604:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Maine
Under Maine Revised Statutes Title 36, Section 533:
- Tax fraud can lead to fines up to $50,000 and imprisonment for up to three years.
Maryland
Under Maryland Code Section 13-706:
- Tax fraud violations can result in fines up to $100,000 and imprisonment for up to five years.
Massachusetts
Under Massachusetts General Laws Chapter 62C, Section 73:
- Tax fraud can lead to fines up to $100,000 and imprisonment for up to five years.
Michigan
Under Michigan Compiled Laws Section 205.27:
- Tax fraud is a felony with penalties including fines up to $50,000 and imprisonment for up to five years.
Minnesota
Under Minnesota Statutes Section 289A.63:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Mississippi
Under Mississippi Code Section 27-7-87:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Missouri
Under Missouri Revised Statutes Section 143.931:
- Tax fraud is a felony with penalties including fines up to $100,000 and imprisonment for up to five years.
Montana
Under Montana Code Annotated Section 15-1-216:
- Tax fraud can result in fines up to $50,000 and imprisonment for up to five years.
Nebraska
Under Nebraska Revised Statutes Section 77-379:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Nevada
Under Nevada Revised Statutes Section 360.300:
- Tax fraud can result in fines up to $50,000 and imprisonment for up to five years.
New Hampshire
Under New Hampshire Revised Statutes Section 21-J:39:
- Tax fraud is a felony with penalties including fines up to $50,000 and imprisonment for up to five years.
New Jersey
Under New Jersey Statutes Section 54:52-6:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
New Mexico
Under New Mexico Statutes Section 7-1-73:
- Tax fraud can result in fines up to $50,000 and imprisonment for up to five years.
New York
Under New York Tax Law Section 1801:
- Tax fraud violations can lead to fines up to $500,000 and imprisonment for up to five years.
North Carolina
Under North Carolina General Statutes Section 105-236:
- Tax fraud is a felony with penalties including fines up to $100,000 and imprisonment for up to five years.
North Dakota
Under North Dakota Century Code Section 57-01-12:
- Tax fraud can result in fines up to $50,000 and imprisonment for up to five years.
Ohio
Under Ohio Revised Code Section 5747.19:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Oklahoma
Under Oklahoma Statutes Section 68-207:
- Tax fraud is a felony with penalties including fines up to $50,000 and imprisonment for up to five years.
Oregon
Under Oregon Revised Statutes Section 305.228:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Pennsylvania
Under Pennsylvania Consolidated Statutes Section 7321:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Rhode Island
Under Rhode Island General Laws Section 44-30-98:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
South Carolina
Under South Carolina Code Section 12-54-44:
- Tax fraud violations can lead to fines up to $50,000 and imprisonment for up to five years.
South Dakota
Under South Dakota Codified Laws Section 10-45-66:
- Tax fraud can result in fines up to $50,000 and imprisonment for up to five years.
Tennessee
Under Tennessee Code Annotated Section 67-1-1440:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Texas
Under Texas Penal Code Section 151.703:
- Tax fraud can result in fines up to $250,000 and imprisonment for up to five years.
Utah
Under Utah Code Section 59-1-401:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Vermont
Under Vermont Statutes Title 32, Section 5934:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Virginia
Under Virginia Code Section 58.1-348:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Washington
Under Revised Code of Washington Section 82.32.270:
- Tax fraud can lead to fines up to $100,000 and imprisonment for up to five years.
West Virginia
Under West Virginia Code Section 11-10-15:
- Tax fraud violations can lead to fines up to $100,000 and imprisonment for up to five years.
Wisconsin
Under Wisconsin Statutes Section 71.83:
- Tax fraud can result in fines up to $100,000 and imprisonment for up to five years.
Wyoming
Under Wyoming Statutes Section 39-15-108:
- Tax fraud violations can lead to fines up to $50,000 and imprisonment for up to five years.