This isn't just about numbers—it's about ensuring everyone pays their fair share to support essential public services.
Tax fraud differs from honest mistakes on tax returns. If you've made an error, you can correct it or work with our best tax relief services to resolve the issue and minimize penalties.
The IRS has established secure channels for whistleblowers to report suspected fraud confidentially, and you may even be eligible for a monetary reward if your tip helps recover unpaid taxes.
What is Considered Tax Fraud?
Tax fraud occurs when someone deliberately deceives the IRS to evade paying taxes. The IRS defines tax fraud as intentional wrongdoing by a taxpayer to evade taxes they know or believe they owe. The key elements are fraudulent intent and owing taxes that are due or past due.
Common examples of tax fraud include:
- Deliberately underreporting or failing to report income, such as cash payments or side business earnings.
- Creating false documents or receipts to claim unauthorized deductions or credits.
- Knowingly failing to file required tax returns despite meeting income thresholds.
- Using stolen Social Security numbers or taxpayer-identification numbers to file fraudulent returns.
- Operating businesses "off the books" to avoid reporting income.
Note that honest mistakes aren't considered fraud. If you accidentally forget to report some income or claim a deduction you weren't eligible for, that error can be corrected.
The distinction lies in intent—while mistakes may result in penalties, only deliberate attempts to deceive the IRS can lead to legal trouble.
How to Identify Signs of Tax Fraud
Tax fraud is usually done to lower the amount of taxes owed for an individual or business—or to get a bigger tax refund. Here are a few signs to help you identify tax fraud:
- Unusually low business income: When a business reports significantly lower income than usual despite maintaining normal operations. For instance, a retail store suddenly reports $80,000 in annual sales instead of their typical $250,000 with no change in customer traffic.
- False dependent claims: Claiming dependents who don't qualify under IRS rules. For example, claiming a child who lives primarily with another parent to receive the $2,000 child tax credit when they don't meet the IRS requirements for custody, age, and financial support.
- Falsified deductions: Claiming fictitious or unqualified deductions to reduce tax liability. This might include a business owner reporting $20,000 in nonexistent office supplies or claiming personal expenses as business deductions without proper documentation.
Steps for Reporting Tax Fraud to the IRS
If you suspect tax fraud is occurring, here are the steps to report it to the IRS:
- Gather information: Collect details about the individual or business, including their name, address, Social Security number, or Employer Identification Number.
- Fill out Form 3949-A: Complete the official Form 3949-A, available on the IRS website or by mail. This form lets you report various types of suspected tax fraud, such as tax evasion, fraudulent claims, identity theft, and unreported income.
- Provide detailed descriptions: On the form, clearly describe the suspected violations and include any evidence you may have.
- Submit the completed form: Send your completed Form 3949-A to the IRS by mail or electronically if possible.
- Expect follow-up communication: Be prepared for the IRS to contact you for additional information or clarification.
- Maintain confidentiality: Your identity will be kept confidential, but providing contact information can help if further details are needed.
- Consider whistleblower protections: If applicable, note that significant information leading to tax recovery may qualify you for an award under the IRS Whistleblower Program through a separate process.
- Stay informed on progress: While updates may be limited due to confidentiality laws, you can check in with the IRS if you have concerns about your report.
What Is the IRS Whistleblower Program?
The IRS Whistleblower Program offers monetary incentives to individuals who provide specific, credible information about tax evasion. If your tip leads to the successful recovery of unpaid taxes, you could receive between 15% and 30% of the collected amount.
To submit a whistleblower claim, you'll need to:
- File IRS Form 211 (Application for Award for Original Information)
- Provide detailed evidence supporting your allegations
- Include specific information about the alleged tax fraud
- Submit all documentation to the IRS Whistleblower Office
Note that whistleblower awards typically apply to cases involving significant amounts of unpaid taxes, which can take several years to complete. However, your identity will remain confidential throughout the investigation.
Why Should You Report Tax Evaders to the IRS?
Jacob Rothman, CFP and founder of Rothman Investment Management, says tax fraud is cheating.
While using tax rules to your advantage (tax avoidance) serves the public interest, shady tax schemes (tax evasion) hurt everyone by withholding taxes without following legitimate rules. When you report tax fraud, you're helping protect all law-abiding citizens.
Government shortages in tax collection can have a massive impact on government-funded programs and tax rates. Reporting tax fraud can help the IRS cover the nearly $700 billion gap in underreported and evaded income taxes each year.
What Happens After You Report Tax Fraud?
After you’ve submitted form 3949-A to report tax fraud—don’t wait for a call from the IRS. Depending on the information submitted, the IRS may choose to pursue the tax fraud case. If the IRS pursues the case, they may seek more information.
If you submit a whistleblower claim, you’ll receive updates about the claim from the IRS until the case is resolved.
Bottom Line
Tax fraud is a serious crime that ultimately takes money away from taxpayers who diligently pay their taxes yearly. You can quickly and easily report suspected tax fraud to the IRS online or via mail using IRS Form 3949-A. You may be eligible for compensation when reporting tax fraud, so completing a whistleblower claim form may also be worth completing.
