Reporting Tax Fraud
Tax fraud is the purposeful evasion of taxes that are owed to the government. This is often achieved by not reporting all income earned during the year, over reporting allowed deductions or claiming additional exemptions. Tax fraud costs the government and therefore the taxpayers a significant amount of money every single year. This is why individuals are encouraged to report any suspected tax fraud to the relevant authority. The IRS will even pay the informant up to 15% of the additional taxes collected. However, this is not as simple as calling up a local IRS agent and telling them that you believe someone isn't paying taxes. There are some key things to keep in mind when reporting tax fraud to any government authority.
First, it is important that you truly suspect that fraud is occurring. By making frivolous reports, the costs associated with investigating these claims will increase. These agents will also be distracted from dealing with real taxation issues. Reporting someone to a taxing authority for reasons like revenge or money can backfire and cause problems for many people.
The IRS has a formalized process that allows individuals to report suspected fraudulent activity. This involves either completing Form 3949-A or sending a letter containing all the pertinent information. This includes the name and address of the person being reported, their social security number (or EIN if it is a business), a description of the fraud and how you became aware of the information, the tax years effected, the dollar amount of any unreported income and your name and contact information. The IRS prefers that reporters identify themselves and will keep this information confidential. However, they will also accept anonymous reports.
Individual states have programs that are very similar to the federal government for reporting fraud. They request most of the same information but would be directed to the state's revenue service. For someone that does suspect tax fraud, they should definitely consider reporting to both the state and federal authorities. This will ensure that the tax cheat would be required to pay all taxes owed and help the government collect everything that they are owed.