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Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return to limit the amount of tax liability. Tax fraud essentially entails cheating on a tax return in an attempt to avoid paying the entire tax obligation. Examples of tax fraud include claiming false deductions; claiming personal expenses as business expenses; using a false Social Security number; and not reporting income. Tax refund fraud can also involve identity theft, fraudulent W-2 forms, and the on-line filing of a fraudulent tax return for the purpose of receiving a tax refund for deposit into the account of the fraudster or a money mule acting on behalf of the fraudster. Variations of this fraud also include using a tax preparation firm and obtaining a refund anticipation loan with the proceeds credited to a prepaid card. Tax fraud may also be referred to as tax evasion.

Understanding Tax Fraud

Tax fraud involves the deliberate misrepresentation or omission of data on a tax return. In the United States, 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 his income tax return
  • Misrepresented the actual state of his affairs so as to falsely claim tax deductions or tax credits
  • Intentionally failed to pay his tax debt
  • Prepared and filed a false return
  • Deliberately failed to report all income received

A business that engages in tax fraud may:

  • Knowingly fail to file payroll tax reports
  • Wittingly fail to report some or all of the cash payments made to employees
  • Hire an outside 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

Tax Fraud vs. Negligence or Avoidance

Claiming an exemption for a nonexistent dependent to reduce tax liability is clearly 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 attributed to negligence are non-intentional, the IRS may still fine a negligent taxpayer with a penalty of 20 percent of the underpayment. Famous people throughout the world have been guilty of tax fraud, such as Lionel Messi.

Given that the tax code in the U.S. is a complex compilation of tax imposition and laws, a lot of tax preparers are bound to make careless errors. 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 expenses.

If you or a loved one is facing potential federal charges related to tax fraud, contact the team at Concepcion Law today by calling [number] to schedule your appointment.