Tax Fraud Penalty

• The Internal Revenue Code section that authorizes the fraud penalty is short and to the point. If a taxpayer ever underpays their tax as a result of intentionally misleading the IRS with the goal of reducing their tax liability, a 75-percent penalty will apply. This penalty doesn't apply to your entire tax liability; rather, it only increases the amount of tax you underpay by 75 percent. Examples of activity warranting the imposition of the fraud penalty include claiming fictitious deductions, claiming dependents that don't exist or intentionally omitting portions of your taxable income.
  
  

Failing to File

• The normal penalty the IRS imposes on taxpayers who forget to file their tax return or do so for reasons other than to defraud the IRS is equal to five percent for each month it's late, for a maximum of five months. However, if your failure to file a return is with the intention of defrauding the IRS to evade the income tax, the IRS can increase the penalty to 15 percent each month, for a maximum of five months or 75 percent of the tax you owe.
  
  

Interest on Penalties

• The fraud penalty may not be the only increase the IRS makes to the amount of tax you owe. Once the IRS assesses your tax liability, the balance of your tax debt begins to accrue interest charges on a monthly basis. However, the interest accrues on both the original tax liability and the fraud penalties. Moreover, there is no limitation on the number of years your balance can increase for interest charges. The only way to stop the accrual of interest is by paying off your tax debt. The interest rate will also fluctuate during the tax year since the IRS uses the variable federal short-term rate and increases it by three percentage points.
  
  

No Limitations Statute

• The statute of limitations limits the amount of time the IRS has to audit your tax return to three years from the date you originally file it. However, this time limitation doesn't apply to tax returns that include fraudulent information or that you fail to file as a means to evading taxes. This means the IRS cannot increase the tax you owe after the three-year period even if your return includes non-fraudulent mistakes that reduce your tax bill. But when you commit fraud, you can never breathe a sigh of relief since the IRS can take as much time as it needs to investigate, regardless of whether it's one year or 30 years after your fraudulent activity.