Tax Fraud: What is It?
A person or corporate organization commits tax fraud when they knowingly and actively falsify information on a tax return in order to reduce their tax liability. In order to avoid paying the full amount of taxes due, cheating on a tax return is the essence of tax fraud. Falsely claiming deductions, classifying personal spending as business expenses, creating a fictitious Social Security number, and failing to disclose income are a few examples of tax fraud.
Tax fraud examples include tax evasion, which is the criminal attempt to avoid paying taxes that are due.
Key Aspects
- The government loses millions of dollars each year due to tax fraud.
- Tax fraud is a distinct problem from tax avoidance or negligence.
- Payroll tax omissions and nonpayments are two examples of business tax fraud.
Tax Fraud: Overview
The intentional misrepresentation or omission of information on a tax return constitutes tax fraud. Taxpayers have a legal obligation to submit a tax return voluntarily and to pay the correct amount of income, employment, sales, and excise taxes in the United States.
Falsifying or withholding facts to avoid doing so is illegal and is considered tax fraud. The Internal Revenue Service Criminal Investigation (CI) division looks into tax fraud. If the following are discovered to be true about the taxpayer:
- Intentionally neglected to submit his income tax return.
- Lied about his financial situation in order to falsely claim tax credits or deductions
- Deliberately neglected to pay his tax debt
- Created and submitted a fraudulent tax return
- Intentionally omitted reporting all revenue received
A company that commits tax fraud might:
- Intentionally omit to submit payroll tax reports
- Deliberately omit to disclose some or all cash payments made to employees.
- Employ a third-party payroll company that doesn’t over funds to the IRS.
- Not deducting FICA (Federal Insurance Contributions) taxes from employee paychecks or federal income tax
- Fail to disclose and pay any payroll taxes that were withheld
Tax Fraud Versus Avoidance or Negligence
For instance, applying the long-term capital gain rate to a short-term earning may be investigated further to establish whether it is negligence, whereas claiming an exemption for a nonexistent dependent to minimize tax liability is obviously fraud. Although errors due to carelessness are unintentional, the IRS may nonetheless impose a fine of 20% of the underpayment on a negligent taxpayer. Prominent celebrities from all across the world, including Lionel Messi, have engaged in tax fraud.
Given that the U.S. tax system is a complicated compilation of tax laws and regulations, many tax preparers are destined to make careless errors.
Tax avoidance, which is the legitimate use of tax law loopholes to lower one’s tax expenses, is not the same as tax fraud. Tax authorities disapprove of tax evasion even when it does not directly violate the law since it can undermine the general intent of the tax code.
Bottom Line
Every year, tax fraud defrauds the government of millions of dollars and is prohibited by fines, penalties, interest, or imprisonment. In general, unless the failure to pay is thought to be purposeful, an entity is not thought to be guilty of tax evasion. Mistakes or inadvertent reporting, which the IRS refers to as negligent reporting, does not constitute tax fraud.
