Generally, Tax fraud involves the deliberate misrepresentation or omission of data on a tax return. In the United States for example and bear in mind that this defers by country, 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:
• Purposely failed to file their income tax returns
•Misrepresented the actual state of their affairs so as to falsely claim tax deductions or tax credits
•Intentionally failed to pay tax debt
•Prepared and filed a false return
•Deliberately failed to report all income received
•Knowingly fail to file payroll tax reports
•Intentionally fail to report some or all of the cash payments made to employees
•Outsource 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
Another type of tax fraud worth mentioning is company and individual identity theft via national ID numbers/Social security numbers or even Employer Identification Number (EIN), a unique tax ID number assigned to each company. The fraudsters then proceeded to devise various methods to mine social media sites like LinkedIn for victims’ employer information. In some cases, the fraudsters will file false claims at the state level a move away from the individual tax returns and submit dozens of state tax filings using the EIN’s over short periods of time very close to tax season, with a 20% success rate.
Yet another prolific tax fraud has been the use of prepaid cards as an indispensable tool of tax fraudsters for several years and still remains one of the favorite methods of cashing out phony tax refunds, as well as the proceeds from a broad range of other cybercrime activity.
Tax fraud results in the loss of millions of dollars every year for governments and is punishable by fines, penalties, interest, or even prison time. Generally, an entity is not considered to be guilty of tax evasion unless the failure to pay is proven to be intentional. Tax fraud does not include mistakes or accidental reporting, which the IRS calls negligent reporting.
Because the tax code in the U.S. is a complex compilation of tax imposition and laws, a lot of people are bound to make careless errors. For example, claiming an exemption for a nonexistent dependent to reduce tax liability is blatant 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 that can be attributed to negligence are non-intentional, the IRS may still fine the taxpayer a minimum penalty of 20 percent of the shortfall payment.
It is important to note however that 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 liabilities. Although tax avoidance is not a direct violation of the law, it is frowned upon by tax authorities as it can be used to compromise the overall spirit of tax law.