What is Tax Fraud: Understanding Tax Evasion

  • By David Lukic
  • Oct 30, 2020

Tax fraud is when a person or company falsified information on their tax return to avoid paying taxes. Tax fraud can also apply to not filing tax returns to avoid paying. Some other definitions of tax fraud are: 

  • Failure to file tax returns.

  • Failure to pay or correctly report taxes

  • Fraudulent returns and return preparation schemes.

  • Erroneous claims for real property and tax abatement programs.

  • Tax evasion activity.

  • Unlicensed businesses.

  • Unrecorded payments to employees.

  • Unreported income.

  • Unreported or untaxed Meals and Rentals Tax.

Tax fraud can apply to both federal and state taxes; it makes no difference, but the penalties and consequences may be different. 

According to the IRS, 75% of tax evasion is perpetrated by individuals and not companies. Roughly 17% of all taxpayers incorrectly fill out their taxes because they either do not know the law or make mistakes. These actions are considered negligence rather than fraud. It becomes fraud when the person intentionally makes an effort meant to reduce the amount of tax paid. 

Sometimes fraud could be as simple as falsifying expenses, income, claiming a nonexistent dependent, or using a false social security number. 

Other Types of Tax Evasion

Tax Fraud

There are also reports where the individual and the IRS are both victims of tax evasion perpetrated by employment or payroll companies. According to FindLaw, some examples are “pyramiding, employee leasing, cash payment, filing false payroll tax returns, and failure to file payroll tax returns.” In these cases, the company deducts the taxes from employees’ wages, but they don’t pay the IRS. 

The IRS warns about phishing emails, which results in tax fraud. Someone emails you pretending to be from the IRS about back taxes owed, and they demand payment and threaten arrest. These are scams meant to bilk money from victims who fall for it.

Other tax frauds are people who prepare tax returns, which are fraudsters. They aren’t licensed or qualified to prepare your taxes, but you pay them a fee to do so, and they file on your behalf. The problem is the tax returns are fraudulent and designed to pay fewer taxes or get a bigger refund. You are the one liable because you hired this criminal to file for you. In some cases, they take your fee and never file the return. 

How to Stay Safe from Tax Fraud

Tax Evasion

If you don’t know how to prepare your own tax returns, hire a professional company like H&R block or a tax attorney to do it for you. Always state your income and expenses accurately. Avoid taking any of the actions below, or you may end up in hot water with the IRS. 

  • “Deliberately underreporting income.

  • Taking payments in cash and failing to deposit them in order to avoid tax consequences.

  • Inflating the value of business expenses.

  • Creating false business expenses for tax purposes.

  • Using a false social security number.

  • Keeping two sets of financial records for your business.

  • Claiming an exemption for a spouse when you are single.

  • Claiming an exemption for a dependent whom you never supported.

  • Destroying your books to conceal tax evasion.

  • Creating false checks or receipts to support deductions that don’t exist or denying that deposits in your accounts are income when they are.

  • Concealing financial accounts from the IRS.

  • Transferring assets to conceal them from the IRS.

  • Reporting personal expenses as business expenses.

  • Claiming more charitable deductions than were made.

  • Failing to file returns even if you make a substantial amount of income.

  • Making false statements to the IRS under oath.

  • Failing to file returns despite having been contacted in prior years by the IRS for failing to file.”

How to Report Someone to The IRS

If you work for a company and discover that they are committing tax fraud, it is your responsibility to report it. If you know of an individual who has committed tax fraud, you should file a complaint. You may be the victim of a stolen social security number, and you can also report that. 

The IRS has a page listing all the different types of tax fraud and how to report them. There are phone numbers you can call. You may also file online or by mail, and if you want to remain anonymous, they have a form you can use to do that as well.

Tax fraud is serious business with hefty fines and prison time. You want to do all you can to avoid any criminal dealings with the IRS.

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