Tax Fraud
Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return to limit the amount of tax liability. Tax fraud is said to be evident if the taxpayer is found to have: Purposely failed to file his income tax return Misrepresented the actual state of his affairs so as to falsely claim tax deductions or tax credits Intentionally failed to pay his tax debt Prepared and filed a false return Deliberately failed to report all income received A business that engages in tax fraud may: Knowingly fail to file payroll tax reports Wittingly fail to report some or all of the cash payments made to employees Hire an outside payroll service that doesn't turn over funds to the IRS Fail to withhold federal income tax or FICA (Federal Insurance Contributions) taxes from employee paychecks Fail to report and pay any withheld payroll taxes For example, claiming an exemption for a nonexistent dependent to reduce tax liability is clearly fraud, while applying the long-term capital gain rate to a short-term earning may be looked into more to determine whether its negligence. Tax evasion, or illegally avoiding payment of taxes owed, may be construed as an example of tax fraud. Tax fraud costs the government millions of dollars a year. Tax fraud is a different issue than tax avoidance or negligence. Failing to report and pay payroll taxes is an example of business tax fraud. Given that the tax code in the U.S. is a complex compilation of tax imposition and laws, a lot of tax preparers are bound to make careless errors. Tax fraud is not the same as tax avoidance, which is the legal use of loopholes in the tax laws to reduce one’s tax expenses. Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return to limit the amount of tax liability.
What is Tax Fraud?
Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return to limit the amount of tax liability. Tax fraud essentially entails cheating on a tax return in an attempt to avoid paying the entire tax obligation. Examples of tax fraud include claiming false deductions; claiming personal expenses as business expenses; using a false Social Security number; and not reporting income.
Tax evasion, or illegally avoiding payment of taxes owed, may be construed as an example of tax fraud.
Understanding Tax Fraud
Tax fraud involves the deliberate misrepresentation or omission of data on a tax return. In the United States, taxpayers are bound by a legal duty to file a tax return voluntarily and to pay the correct amount of income, employment, sales, and excise taxes.
Failure to do so by falsifying or withholding information is against the law and constitutes tax fraud. Tax fraud is investigated by the Internal Revenue Service Criminal Investigation (CI) unit. Tax fraud is said to be evident if the taxpayer is found to have:
A business that engages in tax fraud may:
Tax Fraud vs. Negligence or Avoidance
For example, claiming an exemption for a nonexistent dependent to reduce tax liability is clearly fraud, while applying the long-term capital gain rate to a short-term earning may be looked into more to determine whether its negligence. Although mistakes attributed to negligence are non-intentional, the IRS may still fine a negligent taxpayer with a penalty of 20 percent of the underpayment. Famous people throughout the world have been guilty of tax fraud, such as Lionel Messi.
Given that the tax code in the U.S. is a complex compilation of tax imposition and laws, a lot of tax preparers are bound to make careless errors.
Tax fraud is not the same as tax avoidance, which is the legal use of loopholes in the tax laws to reduce one’s tax expenses. Although tax avoidance is not a direct violation of the law, it is frowned upon by tax authorities as it may compromise the overall spirit of tax law.
Special Considerations
Tax fraud cheats the government out of millions of dollars every year and is punishable by fines, penalties, interest, or prison time. Generally, an entity is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional. Tax fraud does not include mistakes or accidental reporting, which the IRS calls negligent reporting.
Related terms:
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act is a tax law that compels US citizens at home and abroad to file annual reports on foreign account holdings. read more
What Is the Internal Revenue Service (IRS)?
The Internal Revenue Service (IRS) is the U.S. federal agency that oversees the collection of taxes—primarily income taxes—and the enforcement of tax laws. read more
Long-Term Capital Gain or Loss
A long-term capital gain or loss comes from a qualifying investment that was owned for longer than 12 months before being sold. read more
Payroll Tax : Overview & Examples
A payroll tax is a percentage withheld from an employee's salary and paid to a government to fund public programs. Learn more about payroll taxes here. read more
State Income Tax
State income tax is a tax levied by a state on the income of its residents, as well as on any nonresidents who earn state-sourced income. read more
Tax Cheat
A tax cheat is an individual or group who, through fraud, dishonesty, or avoidance, does not pay the obligatory amount of tax they owe. read more
Tax Code
A tax code is a federal government document that details the rules individuals and businesses must follow in paying taxes to the government. read more
Tax Avoidance
Tax avoidance is the use of legal methods to reduce the amount of income tax that an individual or business owes. read more
Taxes
A mandatory contribution levied on corporations or individuals by a level of government to finance government activities and public services read more
Tax Evasion
Tax evasion is an illegal practice where a person or entity intentionally does not pay due taxes. read more