The IRS’s Office of Fraud Enforcement, launched shortly before the Covid-19 pandemic in 2020, is being revived to reduce the approximately $700 billion tax gap, or the difference between the true tax liability for a tax year and the amount that is paid on time. Taxpayers who may have committed fraud can take steps to reduce their risk and mitigate the consequences.
OFE’s mission is “promot[ing] compliance through strengthening the IRS’s response to fraud and mitigating emerging threats,” including assisting IRS employees working tax cases to better identify fraud and develop criminal fraud referrals to IRS Criminal Investigation, and pursuing civil fraud penalties.
The office’s “strategic goals” include helping IRS employees identify tax fraud and using technology and data analytics in fraud prevention efforts. This may prompt additional cause for concern for taxpayers who have engaged in tax fraud, given the renewed emphasis on fraud enforcement and the technological developments that will make it easier for the IRS to identify fraud.
But what exactly is “tax fraud”? The reality is that any conduct can be tax fraud if the taxpayer has the right subjective intent. On the civil side, tax fraud is “an intentional wrongdoing designed to evade tax believed to be owing.” On the criminal side, most tax crimes have an element of willfulness—that is, a voluntary, intentional violation of a known legal duty.
Tax fraud can take many forms, but the IRS looks for certain indicators, such as:
- not having adequate records
- backdating or falsifying records, or maintaining a second, inconsistent set of financial records
- concealing income or assets through offshore banks or complex entity structures
- providing incomplete or misleading information to tax return preparers
- dealing in cash, particularly where the use of cash would be unusual for the type of business activity
These indicators have a common theme: an attempt to conceal or mispresent information to the IRS.
Getting caught engaging in tax fraud carries a high price. First, the IRS may impose civil fraud penalties. If the taxpayer files a fraudulent tax return—meaning a return that contains bogus losses, credits, or deductions, or doesn’t fully report the taxpayer’s income—Section 6663(a) of the tax code imposes a fraud penalty of 75% of the underpayment of tax attributable to the fraud. If the taxpayer fraudulently fails to file, Section 6651(f) also imposes a penalty up to 75% of the tax liability.
There’s also a lesser known but devastating penalty for low-income taxpayers. Under Section 32(k), taxpayers who fraudulently claim earned income tax credits are barred from claiming the credit for the next 10 tax years.
Another important aspect of civil tax fraud is that the statute of limitations for assessment of tax never expires. And a taxpayer can’t start the statute of limitations by later filing an accurate return.
Along with civil penalties, if the government has sufficient evidence to prove the elements of a tax crime beyond a reasonable doubt, the Department of Justice may prosecute the taxpayer. According to the IRS-CI’s 2025 Annual Report, the government initiated 1,380 investigations for tax crimes, recommended prosecution in 834 cases, and 589 defendants were sentenced.
Although these numbers are small in comparison to the approximately 163 million individual returns filed each year, the impacts to the individuals are significant, as the majority of these offenders are sentenced to time in prison.
For example, IRS-CI reports that 82% of defendants convicted of employment tax evasion were sentenced to prison, and for non-filers, that rate was 80%. The Justice Department has six years after the criminal conduct to charge tax crimes—meaning six years after the fraudulent return was filed.
Taxpayers who have committed fraud and want to reduce risk should first stop the fraudulent conduct. This might seem like a no-brainer, but many taxpayers are afraid that if they start filing accurate returns, it will tip off the IRS that previous returns were false.
For example, if the taxpayer didn’t report their foreign bank accounts, reporting those accounts in the next tax return may cause the IRS to question prior returns. This may well be, but continuing to file false returns only makes the taxpayer a bigger target. It’s much better for a taxpayer to argue that as soon as they realized their mistake, they started filing accurately rather than continuing to commit tax crimes, year after year.
Taxpayers who haven’t been contacted by the IRS and meet other qualifications may be able to use the IRS’s voluntary disclosure practice in which IRS-CI will agree not to refer the taxpayer for criminal prosecution if the taxpayer corrects their non-compliance and pays the tax, penalties, and interest. The IRS is revamping its voluntary disclosure practice, but you can still review the terms of the current practice.
If the IRS opens a civil audit first, the taxpayer shouldn’t make matters worse. Attempting to obstruct the IRS or being untruthful in response to an audit may cause a referral to IRS-CI. Of course, a taxpayer who has concerns about the IRS viewing their activities as fraudulent should retain an attorney who can ensure that their rights are protected, including any Fifth Amendment right against self-incrimination.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Megan Brackney is a tax controversy attorney and partner at Kostelanetz.
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