Definition

Tax Fraud

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What is tax fraud?

Tax fraud is an intentional act of submitting false information to limit tax liability while filling tax return.

To avoid tax obligation, an individual or a business entity sometimes omits or misrepresent the data. This behavior of falsifying tax-related information is considered illegal. When the fraud is done unintentionally, the taxpayer or entity in question is generally not charged as guilty.

It is regarded as tax fraud when a business entity or an individual willingly attempts one of the following practices:

  • Failure to pay the actual tax liability
  • Failure to file the income tax return
  • Failure to submit the entire income
  • Submission of fraudulent claims and information

 

What are the different types of tax fraud?

Some of the common scenarios explaining tax frauds are as follows:

  • An intentional attempt to skip tax payments:

If the taxpayer intentionally does not file the tax return, submits false claims, or does not pay the total tax, they are liable to punishment as per the laws.

At times, the tax collecting authorities give the benefit of the doubt to the taxpayer, as they understand the tax regimes are quite complex in understanding. But if the authorities are unable to find any evidence that the tax was unintentionally unpaid, there could be severe repercussions.

  • Submitting false tax claims:

While filing the income tax returns, it is expected from the taxpayer that they will submit legitimate claims to avoid any legal charges in the future. In case the taxpayer submits frivolous and fake claims to reduce the payable taxes, it is considered illegal.

  • Payroll and employment tax frauds:

A payroll tax is a percentage of deduction from an employee’s salary that is submitted to the government. It is considered a tax fraud if a business underreports the actual workforce, deducts the payroll tax from employee’s salary and does not hand it over to the tax authorities.

The practice of not submitting payroll taxes to the tax collecting authorities is known as ‘pyramiding’.

  • Refund fraud and abusive tax schemes:

It is considered a tax fraud is a taxpayer fakes eligibility for a refund by showing fake deductions while filing the income tax return.

  • Cashing out employees:

When an employer or an outsource employment agency compensates its employees in cash, it gives rise to potential tax fraud as the employers can submit false claims by showing less workforce and payroll tax submission.

Summary
  • Tax fraud is an intentional act of submitting false information to limit the tax liability while filling the tax return.
  • Tax evasion is a form of tax fraud.
  • Intention to skip tax payments, submitting false claims, payroll frauds, and employment fraud are few examples of intentionally committing tax fraud.

Frequently Asked Questions (FAQs)

  1. What steps can one take if they unintentionally commit tax fraud and are charged for it?

If someone unintentionally commits tax fraud and are charged by authorities for it, here are some suggestions to follow:

  • Immediate response: To avoid tax litigation, it is advisable to contact an experienced tax attorney upon the receipt of the legal notice and respond as soon as possible.
  • Collate all the records: Locate and collate all the relevant documents in one place. Tampering with any information that can serve as evidence or making contact with potential witnesses is advised against.
  • Prepare yourself for the process: Set an appointment with the tax lawyer to understand and get guidance regarding the interaction process.
  1. Is tax evasion different from tax fraud?

Tax evasion is an act when an individual or a business entity willfully misrepresents their taxable income to avoid tax liability. The misrepresentation of income includes failure to show income, overstating the expenses and deductions, falsifying documents and receipts, disclosing false dependents, etc.

Tax fraud is more extensive, and tax evasion is a part of it, making both illegal.

  1. Are tax fraud and tax avoidance both illegal?

Tax fraud is an intentional act of submitting false information to limit the tax liability while filling the tax return. To avoid the tax obligation, an individual or a business entity omits or misrepresent the data. It is an illegal activity.

Tax avoidance uses legal methods to lower the amount of tax owed by an individual or business entity. For example, tax payments are avoided legally by deploying as many as deductions possible. Avoiding tax is done under the provision of law and not by indulging in illegal practices. A proactive individual will plan the investments before the tax liability arises.

Some of the ways to legally avoid tax payments are:

  • Creation of an individual retirement account to reduce taxable income.
  • Investing in tax saving schemes.
  1. How can a legal entity accidentally commit tax fraud?

Some examples where a legal entity accidentally commits tax fraud are as follows:

  • Filed an income tax return with missing or incorrect information:

It is very critical to file a complete and correct income tax return before submitting it. All the documents that can help in tax deductions should be submitted along with the forms. To avoid any mistake, the use of tax preparation software or assistance from professional tax preparers can be helpful.

  • Claiming the earned income tax incorrectly:

To avoid claiming the incorrect earned income tax credit, visit the income tax return filing manual and file accordingly. Claiming false income credits will lead to fraud.

  • Claiming wrong deductions:

Before claiming any deduction, it is essential to judge it should be necessary. For instance, taking a family on a business tour and claiming it as a deduction will be considered tax fraud.