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Why the IRS starts looking for fraud

It's January, which means that it won't be long before the Internal Revenue Service (IRS) starts its annual parade of tax notifications and warnings, all designed to remind people -- especially business owners and professionals -- of their legal obligations.

In other words, you're being reminded that it's against the law to cheat on your taxes, and that the IRS will aggressively pursue suspected tax fraud whenever they can. But what makes the IRS start to question what's going on with your taxes in the first place? How do they pick who gets investigated?

  • The Information Returns Processing (IRP) System: This system draws matches between related returns and electronic records. Payroll records, W-2s, 1099s and more are loaded into computer databases, and the IRS looks for gaps in the paper trial between them.
  • Social media information: Human beings tend to like to display their wealth in ways both subtle and obvious. If your visible lifestyle conflicts with what seems to appear on your social media page, you can bet that the IRS is likely to be curious. Far too many people don't realize just how much social media is used in legal investigations these days and think that what they post online is somehow likely to be overlooked. (There's even a possibility that the IRS may be looking at your old emails, thanks to a gap in the Electronic Communications Privacy Act that makes email over 180-days old on a third-party server legally "abandoned.")
  • Whistleblower reports: There's huge legal, ethical and financial incentives for a whistleblower to let the IRS know about a company's or professional's wrongdoings. Aside from all of that, some whistleblowers are motivated out of anger or revenge. An angry romantic partner or a disgruntled employee might relish "turning you in" to the IRS -- even if there wasn't a reward.

If you're targeted for investigation of tax fraud by the IRS, make no mistake: You're already in trouble. Find out what you can do to protect your future, preserve your rights and get out of the legal nightmare.

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