Tax Fraud

A business that commits tax fraud is typically involved in these scenarios:

• The company fails to report and pay withheld payroll taxes.
• The business hires an outside payroll service that doesn’t submit funds to the IRS on purpose.
• The business knowingly fails to file payroll tax reports.
• The company fails to report some or all cash payments made to employees.

The key difference between both terms is that tax avoidance is legal, while tax evasion is a criminal offense. Tax evasion is a form of tax fraud and it involves deliberately misrepresenting taxable income to the IRS. In the meantime, tax avoidance uses legal methods to reduce taxes and is generally accepted, though sometimes ethically debated.

The IRS matches the data collected from employers and financial institutions through the  Information Returns Processing System, where forms like W-2s and dividend statements are submitted. If auditors or analysts suspect potential tax fraud, the IRS can initiate a criminal investigation. Law enforcement agencies can also issue reports on tax fraud and trigger an investigation. 

It’s a very serious crime that is classified as a felony by the IRS. Fines can go up to $500,000 for businesses and  $100,000 for individuals, including other penalties, such as covering prosecution costs or having to serve up to three years in prison. 

The most common fraudulent practices regarding violating tax rules include keeping two sets of books and making false entries in records, as well as under-reporting income (for example, if a business owner doesn’t report some receipts on purpose). 

Tax fraud has major negative consequences and can lead to potential tax increases and higher prices in general, and deteriorating infrastructure. So, when taxpayers avoid paying taxes, it affects all taxpayers, both businesses and individuals, who then need to bear the burden of covering these shortfalls.

Yes. While claiming personal expenses as business expenses is common, it’s illegal. People often use this method for personal and professional assets, like cars. To avoid this, taxpayers should maintain accurate records, correctly detailing their expenses. 

Given the complexity of the tax code, taxpayers often make errors not on purpose. However, while negligence is unintentional, the IRS can impose a fine. For example, negligence is misapplying the long-term capital gain rate. In contrast, tax fraud requires clear fraudulent intent, which can be hiding income or falsifying tax reporting information.