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Underreporting income: When can it lead to a criminal investigation?

If you get a notice from the IRS about underreporting income, it doesn't necessarily mean you've done anything wrong. In many cases, resolving the matter can be done by correcting the reported income information.

It's true that the tax code contains accuracy-related penalties for negligent or substantial understatement of income. But those are not criminal penalties.

In certain cases, however, IRS concerns about the underreporting of income may trigger a criminal investigation. When can this happen?

CP-2000 notice

A notice of underreported income is also called a CP-2000 notice.

Keep in mind that this isn't the same as an audit. A notice of underreported income merely means the income you reported to the IRS doesn't match other information about your income that the IRS has.

The IRS gets this information third-party sources such as employers and banks. But it may be wrong. For example, in cases of identity theft, someone else may have used your name or Social Security number.

Te IRS has a computerized program for generating CP-2000 notices in cases where the information isn't matching up. If you get a notice like this, you need to respond, but you aren't being audited.

Role of civil audits

If your notice of underreported income doesn't get resolved, you could find yourself subjected to a tax audit. This may involve supplying additional information to the IRS.

In essence, an audit involves a throughout review of the information on a return and its compliance with tax law.

This is a civil process. But most criminal investigations start as civil audits. So if you have reason to believe the IRS will find something of serious concern, it's important to get knowledgeable legal counsel.

Criminal investigations

Criminal investigations are handled by a division of the IRS that is separate from the civil division. The Criminal Investigations (CI) division can get in involved when a revenue agent suspects that a taxpayer's lack of tax compliance is willful.

Of course, to show willful tax evasion or fraud, the authorities will have to that you intended to violate the law. This is not the same as simply trying to minimize your taxes or making careless mistakes. In other words, there is a big difference between tax evasion and tax avoidance.

If you are in that situation, however, it is critical to get a skilled attorney to defend your rights.

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