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Understanding Tax Fraud

By
Lia Kopin-Green
/
March 6, 2023

Taxes are an essential element of our society. They help fund public education, healthcare, infrastructure, and other important programs. Considering their significance, engaging in tax fraud and attempting to cheat the system is a serious offense. Those who harm the integrity of the tax system are subject to severe consequences, such as hefty fines and imprisonment. Understanding tax fraud is crucial in order to safeguard yourself and your business from falling prey to its harsh repercussions. In this article, we will address some of the most frequently asked questions about tax fraud and offer guidance on how to avoid it.

What is Tax Fraud?

Tax fraud is an illegal activity in which individuals or businesses intentionally provide false information to the government in order to avoid paying the full amount of taxes they owe. Simply put, tax fraud involves cheating on a tax return to limit one’s tax liability. Tax fraud directly violates the United States taxpayer’s legal duty to file a tax return voluntarily and to pay the correct amount of taxes. The Criminal Investigation (CI) unit of the Internal Revenue Service (IRS) is responsible for investigating tax fraud crimes.

Despite the severe repercussions and criminal status associated with tax fraud, it is a relatively frequent occurrence. According to former IRS chief Charles Rettig, tax fraud costs the United States $1 trillion per year.

Types of Tax Fraud

Tax fraud comes in many different forms. Outlined below are some of the prevalent forms of tax fraud:

  • Underreporting Income: Taxpayers who deliberately misrepresent the amount of income they earn in order to lower their tax liability are committing tax fraud. The consequences of underreporting income can be significant, including the possibility of imprisonment and other severe penalties.
  • Offshore Tax Evasion: Hiding assets or income in offshore accounts to evade taxes is considered a crime according to US law. In these cases, taxpayers may establish shell companies to conceal their ownership of these accounts. 
  • Employment Tax Fraud: This type of fraud generally occurs when employers fail to report or withhold payroll taxes from their employees’ wages. Employment tax fraud may also happen when an employer compensates an employee through cash payments “under the table,” resulting in the avoidance of taxes.
  • Claiming Unqualified Deductions: Applying or claiming deductions that you are not eligible for may be deemed as tax fraud. Examples of unqualified deductions include claiming charitable donations for organizations that are not recognized by the IRS.

Consequences of Tax Fraud

The US government takes tax fraud crimes extremely seriously. A person found guilty of committing tax fraud can face a maximum penalty of five-year imprisonment, according to the Internal Revenue Code’s Section 7201. In addition, as an individual, you may be fined up to $250,000. The maximum fine for corporations convicted of tax fraud is $500,000. The precise exact term and financial penalty for a tax fraud case will depend on the specific circumstances of the offense.

Tax Fraud vs. Negligence

While it is understandable to confuse these critical concepts, there are notable distinctions between committing tax fraud and committing tax negligence. Tax fraud generally involves a deliberate and willful attempt to cheat the system and minimize tax liability. For instance, opening an offshore account with the goal of evading taxes would be considered tax fraud. Tax negligence, on the other hand, typically refers to accidental or unintentional errors in tax returns that leads to underpayment of taxes. A common example of tax negligence is making a simple math error in a tax return, or forgetting to report income. Given that tax law is highly complex and technical, it is not uncommon for a taxpayer to make certain errors. Nonetheless, the IRS may still choose to charge a negligent taxpayer with a fine of 20 percent of the underpayment.

Avoiding Tax Fraud

If you are looking to reduce your tax liability, it is important to keep in mind that there may be legal options available that allow you to do so. Instead of resorting to tax fraud, consider meeting with a tax lawyer or other tax expert to learn about various lawful ways you may be able to claim tax deductions. 

Another way to make sure you are staying on the right side of tax fraud laws is by setting up an organized tax planning structure alongside your tax attorney. In addition, you should also avoid associating yourself or your business with any other companies that are on trial for tax fraud.

Seeking Legal Support

Have you been accused of tax fraud? Are you looking for ways to limit your tax responsibility without breaking the law? Consult with one of our top-tier tax specialists today. Our tax lawyers have vast experience in United States tax law and are ready to help you navigate any tax issue you may face.

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