Will I Get Caught? Playing IRS Audit Roulette

Will I Get Caught? Playing IRS Audit Roulette

“Will I get caught?” is one of the most common questions we are asked by potential tax clients. Unfortunately, no one knows the answer.

Depending on the type of tax problem, your chances of getting caught vary widely. For example, in recent years, the IRS has installed sophisticated audit selection and refund fraud software. Getting an audit notice may be nothing more than an IRS computer saying your return varies from their preprogrammed norms. If your return is legit, a couple letters can often resolve the audit.

Sometimes, people get caught because a disgruntled employee, neighbor, jilted spouse or {fill in the blank} calls the IRS toll free tip line. If you didn’t already know it, the IRS allows people to make anonymous complaints and has a reward program that can pay tens of thousands of dollars or more if a tip results in new tax collections.

“Throwing someone under the bus” is nothing new, except now the government pays for the information.

Many times, people are caught because the IRS is simply on the lookout for particular behaviors. Unreported offshore accounts, welfare benefit plans and employee leasing “subcontractor” schemes are examples of areas that generate much IRS interest and investigation.

In a few high profile cases it was revealed that tax agencies paid foreign bank employees to steal information regarding the identities of account holders. While he IRS hasn’t done this directly, the agency has accepted that same stolen information from other countries’ tax agencies.

Taking your chances with the IRS is often called the “audit roulette.” Like the popular term Russian roulette, the stakes are quite high. If avoid detection, you save yourself money. If you lose, at best you have to pay all the tax you failed to pay, plus interest, plus penalties. Getting caught also means you are more likely to get audited again in the future.

I said that back taxes, interest and penalties were what happened to people who were lucky. If you are unlucky, you could find yourself in a federal prison. Statistically, the odds of just being audited are much, much greater than facing prison. Don’t cite those statistics, however, to those who were selected for a criminal investigation and later indicted.

Of the many people with tax problems we have helped, most never set out to evade their taxes. In many cases, people fell on hard times, couldn’t pay bills or just decided to cut corners “just one time.” Unfortunately, once you cheat the IRS or fail to file your return, the slippery slope becomes quite steep. One year becomes a second year and pretty soon you are so deep you can’t easily come clean and pay your back taxes. Each year that you don’t file or cheat, however, your chances of getting caught go up significantly.

Deciding to come into compliance is a difficult decision for many people. The one benefit, however, is that if you make the first contact you can generally always avoid jail. The IRS adheres to a strict first contact policy meaning they won’t prosecute if the taxpayer comes forward first. If the IRS makes the first move, however, find a very good lawyer that concentrates in audit defense and criminal tax.