There is a wide range of activities that the Internal Revenue Service may consider tax fraud. It can be something as complicated as participating in white-collar crime or something seemingly simple and innocuous, such as failure to file tax returns.
Tax evasion is a specific type of fraud that involves misrepresenting your income so that it looks like you owe less than you really do. According to MarketWatch, tax fraud can carry serious consequences, legal and otherwise.
If you pay less in taxes than what you owe, the IRS can not only make you pay back what you owe, it can also charge you interest on the amount. Any payments that are late may be subject to a penalty. Penalties and interest can add up quickly. The IRS can also impose hefty fines if it believes that you have deliberately falsified your tax return. Fine amounts can range up to $250,000 regardless of how much you actually underpaid.
While the IRS cannot put you in jail, the evidence that it turns up while investigating your tax return is admissible in court. If there is sufficient evidence to charge you with a crime, you may have to stand trial and could face prison time.
The IRS investigates tax anomalies by conducting an audit, which is an extensive review of your financial records and taxes. An audit in itself is not an indication that you did anything wrong; it just means that there was something on your tax return that warrants further review. However, an audit is a costly, time-consuming process. During an audit, the IRS has the right to review your tax records going back six years. If it finds more anomalies, it could require you to pay more in fines and penalties.
Misrepresenting your income could have consequences when you try to take out a loan. Lenders look at your tax forms to get an idea of your income. If you have not reported all your income, it may appear to a lender that you cannot afford the loan, which could result in a denial of your application.