Tax Fraud Definition

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Tax Fraud Definition

What is Tax Fraud?

When a person or corporate organization wilfully and purposefully falsifies facts on a tax return in order to reduce the amount of tax due, this is referred to as tax fraud. Tax fraud is defined as falsifying a tax return in order to avoid paying the whole tax due. Claim fake deductions; claim personal spending as company expenses; use a bogus Social Security number; and fail to disclose income are all examples of tax fraud.

Tax evasion, or fraudulently evading payment of outstanding taxes, is a form of tax fraud.

Key Takeaways

  • Every year, the government loses millions of dollars due to tax evasion.
  • Tax evasion is not the same as tax avoidance or carelessness.
  • Non-reporting and non-payment of payroll taxes is a form of company tax fraud.

Understanding Tax Fraud

Tax fraud is defined as the intentional misrepresentation or omission of data on a tax return. Taxpayers in the United States have a legal obligation to submit a tax return voluntarily and to pay the right amount of income, employment, sales, and excise taxes.

Failure to do so by misrepresenting or withholding information is illegal and amounts to tax fraud. The Internal Revenue Service Criminal Investigation (CI) unit investigates tax evasion. Tax evasion is considered to be apparent when the taxpayer is shown to have:

  • He purposefully did not submit his income tax return.
  • He misrepresented the true situation of his affairs in order to fraudulently claim tax deductions or credits.
  • He purposefully neglected to pay his tax obligation.
  • I prepared and submitted a bogus return.
  • knowingly omitted to record all money received
  The 20/10 Rule of Thumb

A business that engages in tax fraud may:

  • Willfully failing to submit payroll tax returns
  • Deliberately neglect to declare some or all cash payments given to workers.
  • Employ an outside payroll agency that does not report money to the IRS.
  • Failing to deduct federal income tax or FICA (Federal Insurance Contributions) from employee paychecks
  • Failure to report and pay any payroll taxes withheld

Tax Fraud vs. Negligence or Avoidance

Claiming an exemption for a nonexistent dependant to minimize tax liabilities, for example, is plainly fraud, but applying the long-term capital gain rate to a short-term profit may be investigated further to establish if it is carelessness. Although errors attributable to carelessness are unintentional, the IRS may nonetheless punish a negligent taxpayer 20% of the underpayment. Tax evasion has been committed by celebrities all throughout the globe, including Lionel Messi.

Given that the United States’ tax system is a complicated collection of tax rules and laws, many tax preparers are prone to make foolish mistakes.

Tax fraud is not the same as tax avoidance, which is the legitimate exploitation of tax loopholes to decrease one’s tax liabilities. Although tax evasion is not a direct violation of the law, tax authorities frown on it since it may undermine the general spirit of tax law.

Special Considerations

Every year, tax fraud defrauds the government of millions of dollars and is penalized by fines, penalties, interest, or jail time. In general, an entity is not regarded guilty of tax evasion unless the refusal to pay is deliberate. Tax fraud excludes errors or unintentional reporting, which the IRS refers to as negligent reporting.

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