Tax Fraud: Everything You Need to Know

There are various types of tax fraud, all of which attract penalties. Without the proper guidance, a small tax problem can quickly spiral and cause problems with the Internal Revenue Service.

You could also get arrested and charged with tax-related criminal offenses.

Tax fraud is when an individual or business intentionally and willfully provides false information on their return to limit tax liability. Essentially, it is cheating on your tax return to evade paying some or the total tax liability.

A business or individual may commit tax fraud by claiming personal expenses as business expenses, claiming false deductions, or not reporting income. Tax evasion is also an example of tax fraud as it is viewed as dodging payment of taxes you owe.

It is common to make mistakes when filing your taxes. However, this does not mean you have committed tax fraud. 

You can only be charged with tax fraud if you intentionally filed your tax return incorrectly. Of course, you may owe penalty fees for incorrect filing, but making an error is not a crime.

Taxpayers have a legal duty to voluntarily file returns and pay the correct taxes, including income, sales, excise, and employment taxes. However, the government loses millions of dollars to tax fraud each year.

Many dishonest businesses and individuals falsify and withhold information which is illegal and considered tax fraud. The IRS Criminal Investigation Unit is in charge of investigating tax fraud. As an individual, you may have committed tax fraud if:

Businesses commit tax fraud by:

The income tax system is built on voluntary compliance. This means that you volunteer to pay your taxes. You may attract criminal tax charges if you do not file your tax return or file fraudulent returns.

The IRS must collect revenue from taxpayers to fund the federal government. The government loses revenue through:

Generally, you are not considered guilty of committing tax fraud unless you intentionally failed to pay or willfully falsified your information. Tax fraud does not include accidental reporting or mistakes, which the IRS considers negligent reporting.

For the IRS to determine tax fraud, there must be proof of a willful intention to hide or falsify information to reduce or eliminate the tax liability. The IRS may evaluate several factors when investigating tax fraud. 

However, the IRS may consider the mistakes unintentional negligence rather than tax fraud if there is insufficient evidence.

If you are charged with unintentional negligence, your case is pursued as accidental, and you must pay the penalty. In this case, the charge is not criminal, and the penalties applied amount to 20% of the tax underpayment.

It is critical to ensure that all the information you provide when filing a tax return is correct and up to date. Being diligent and providing accurate tax filings can help you avoid penalties and fines. To lower your payments, consider hiring a tax professional to help you reduce your tax liability.

In addition to willful failure to fulfill your tax obligations, there are several types of tax fraud.

Making frivolous tax claims may be considered tax fraud. For instance, some taxpayers argue that federal income tax is illegal. However, all U.S. citizens must file accurate tax returns and pay the total income tax owed.

Arguing the illegality of income tax does not absolve citizens from paying tax, and the IRS may issue additional penalties for wasting their resources on frivolous claims. You may also accrue additional liabilities through fines.

You may be guilty of payroll fraud if you have committed offenses such as:

This type of tax fraud is where an entity files a false income tax return to obtain unearned tax refunds. It typically involves identity theft and may also include:

There are tax options that can legally reduce your tax liability. However, if a business employs a tax scheme that fraudulently uses offshore resources, it is considered tax fraud. It is always best to consult a tax professional to avoid using abusive tax schemes.

There are different types of employment tax fraud. The most common fraud scheme involved outsourcing payroll activities to a company that steals or does not turn over employment taxes, leaving an unpaid tax liability.

The second type of employment tax fraud is pyramiding. This is where employers withhold income tax but do not remit it to the IRS. 

The last type of employment tax fraud is cashing out, where employees are paid in cash. As a result, the payroll records do not reflect wages paid to employees.

As an employer, if you are convicted of employment tax fraud, you may end up in prison for up to five years.

Tax preparers are tax professionals who help individuals or businesses file their taxes. When a tax crime occurs within a false tax return filed by these professionals, it is called tax preparer fraud.

If the IRS detects tax preparer fraud, it is still the taxpayer’s responsibility to pay what is owed and any penalties that apply. 

You must choose your tax preparer wisely to avoid getting in trouble with the IRS. Confirm their credentials on the Directory of Federal Tax Return Preparers.

While the chances of getting charged with criminal tax fraud are minimal, it is still best to protect yourself. Generally, the IRS must find proof of the taxpayer’s intention to knowingly defraud the government by reducing or eliminating their tax liability.

Should the IRS charge you with tax fraud:

Contact a registered tax preparer, CPA, or tax expert to help you accurately file your income tax return to avoid tax fraud. Consider hiring a professional who is familiar with your professional background. 

Remember, should the IRS alert you to any problem with your return, contact your tax preparer immediately.