Individual Income Tax Insights: Avoid Evasion and Fraud This Tax Season


Tax season is right around the corner, so it’s a good time to get familiar with some of the pitfalls taxpayers could fall into: tax evasion and fraud.

No one is immune to investigations of potential tax improprieties. On Dec. 15, the secretary of the New Mexico Taxation and Revenue Department, Demesia Padilla, resigned from her post after a search warrant was executed the day before pertaining to Padilla and her husband, according to Bloomberg BNA’s William H. Carlile. The search warrant affidavit states that Padilla’s 2011-2013 tax return records may contain evidence of “criminal acts of tax evasion” because, allegedly, certain deposits to accounts in Padilla’s name were not disclosed on her Financial Disclosure statements and investigators believe these deposits to be “potential taxable income.” The warrant affidavit notes that the New Mexico Office of the Attorney General received a tip from anonymous revenue department employees in July 2015 that alleged “illegal and financially questionable acts.” The Office of the Attorney General later received a referral from the New Mexico Office of the State Auditor regarding an allegation that Padilla had “used her position [as Cabinet Secretary of the New Mexico Taxation and Revenue Department] to obtain preferential treatment for a former tax client.” No criminal charges related to this investigation have been announced against Padilla or her husband.

Criminal penalties for tax evasion or fraud vary among the states. For example, in Alabama and Massachusetts, tax evasion is a felony punishable by a fine of up to $100,000, up to 5 years’ incarceration or both. New Mexico punishes tax evasion as a felony with the same maximum jail time, but limits the fine to between $1,000 and $10,000. Similar violations in the District of Columbia are classified as misdemeanors or felonies based on the amount of tax evaded: if under $10,000, the crime is a misdemeanor punishable by a $5,000 fine and up to 180 days in jail, but if over $10,000, it’s a felony punishable by a fine equal to three times the amount evaded and up to 10 years in jail.

States are concerned with much more than just the run-of-the-mill tax evaders, however. Over the past few years, state tax authorities have been cracking down on fraud related to identity theft. The basic scheme for this type of fraud is the filing of false returns by someone using the identity of another in an attempt to obtain a refund. Illustrative of the scope of the problem at the federal level, the IRS estimates that over 5 million refunds were claimed on returns filed using stolen identities in the 2013 filing season.

States combat identity theft tax fraud in a number of ways. Some states, like Oregon, withhold refunds for specified periods after returns are filed in order to allow the state tax authorities to match information from the return with information provided by employers. Other states, like Louisiana and Georgia, have instituted security measures which the tax authorities say may cause longer processing times (anywhere from 60 days to 14 weeks), depending on the method of filing and whether the taxpayer has filed returns with the state in the past.

While the increased delay between filing a return and being issued a refund may upset some taxpayers, the alternative—being a victim of fraud—could cause far more problems and take much longer to resolve. Taxpayers who believe they are the victims of fraud or who would like to report suspected tax fraud should contact their state’s taxing authority; links to state government and tax-related websites are here (subscription required; accessible with free trial).

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn:  Are states doing enough to combat tax evasion and tax fraud?

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