If you are under investigation for tax fraud by the Internal Revenue Service (IRS), you are likely feeling a mix of anxiety and uncertainty. The civil fraud penalty is one of the most severe consequences a taxpayer can face. However, the good news is that understanding the process and knowing your rights can go a long way in protecting you from costly mistakes and ensuring that you handle the situation properly. Here is a comprehensive breakdown of the civil fraud penalty, what it means for you and how to protect yourself.
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What Is the Civil Fraud Penalty?

The civil fraud penalty is imposed when the IRS determines that you intentionally falsified your tax return in order to evade paying taxes. According to Section 6663 of the Internal Revenue Code, the penalty amounts to a staggering 75% of the taxes owed. To make matters worse, even if the IRS proves that only a portion of the underpayment is attributable to fraud, the 75% penalty applies to the entire underpayment, except to the extent the taxpayer can show by a preponderance of the evidence the portions of the underpayment that were not fraudulent. Thus, for example, a $100,000 underpayment attributed to fraud becomes a $175,000 liability, plus interest on the full tax and penalty deficiency.