About Tax Fraud
According to the Internal Revenue Service (IRS), adult United States citizens are legally obligated to voluntarily comply with U.S. tax law by filing tax returns when required in order to determine and pay the proper amount of taxes. Individuals who intentionally fail to meet this responsibility can become subject to investigation by the IRS for tax fraud, a crime that carries a penalty of fines, the seizure of assets and even imprisonment if a conviction is obtained.
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Function
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Individuals generally commit tax fraud, also called tax evasion, for two main reasons: to pay a smaller amount of taxes to the IRS than what is actually owed or to pay no taxes at all. The fraud can also be perpetuated on a personal or corporate level, in the first case to keep a larger amount of income and in the second to inflate the worth or financial health of a company. Another type of complex tax evasion involves money laundering schemes that can employ individuals and businesses around the world to conceal the true identity of illegally gained money and avoid paying taxes on it.
Types
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While the most common motivation for committing tax fraud is to retain a larger amount of income, the IRS also recognizes other classes of tax evasion that include Abusive Return Preparers who purposely file incorrect tax forms for clients, Abusive Tax Schemes that use secrecy laws in foreign countries to hide income and assets, and Non-filers who claim involuntary tax payments are illegal.
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Features
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Americans who attempt to avoid paying the correct amount of taxes employ various strategies to achieve that goal. On tax forms, IRS auditors look for criminal activities that include claiming false deductions or overstating actual deductions, claiming personal expenses as business expenses and omitting or underreporting income. In the tax evader's office or home, IRS audits look for fraudulent behavior ranging from maintaining two or more sets of accounting records, entering false information in financial books or records, and trying to transfer or hide assets or income.
Considerations
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Tax fraud differs from similar tax negligence, which applies in cases where an individual unintentionally files an incorrect tax return due to poor advice from a tax preparer or advisor, or inadequate knowledge of complex tax laws. Although people who commit tax fraud and tax negligence may have similar types of errors on their tax returns, the intent is very different in each case. Auditors employed by the IRS are trained to tell the difference, which partially accounts for the low number of Americans prosecuted for tax fraud each year.
Misconceptions
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Although prosecution of tax fraud is extremely low and the threat of large fines, loss of personal assets and incarceration should serve as enormous deterrents, the IRS estimates that more than 15 percent of taxpayers deliberately cheat on their tax returns annually. The most frequent offenders are workers whose jobs involve large amounts of cash, such as restaurant waiters and waitresses, followed by self-employed workers.
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