Definition of Tax Fraud
Tax fraud (also known as tax evasion) is an illegal activity wherein few category of tax payers does not pay his tax liabilities by way of falsely claiming expenses, misreporting of his incomes, misrepresentation of facts or suppression of facts or providing false evidences, with the only intention to avoid payment of tax to the government.
- Tax fraud means tax evasion. It means if you earn something, you do not intend to pay to the government of your country. Let’s understand why paying taxes is essential.
- Government of any country is responsible for every citizen of the country, its defence, its cashflows, its growth, its infrastructure & many other things. It needs to ensure availability of basic essential facilities for every resident of the country. Basic essential facilities such as hospital, transportation, food supplies for poor, infrastructure, etc. For expenditure on such necessities, it needs funds. Thus, the biggest source of government is tax revenue (direct as well as indirect).
- Using such tax revenues, government can ensure the facilities. Government also needs to fund the research & development within the country, its defence equipment & defence army. Countries are in the process of discovering vaccine for COVID-19. Such research work requires fund flow. The same is provided by government. So, at least it’s the tax payer’s money which comes around him.
- That’s the reason why we pay taxes. So, now you may understand that tax frauds are conducted by those inhuman beings who do not care for their country & its people.
- Tax frauds basically refers to misrepresentation of facts, suppression of facts, falsely claiming the expenditure, not offering any income to tax, etc.
- IRS has specified the following as tax frauds:
- False claim for exemptions or deductions
- Failure to withhold tax when asked for
- Failure for payment of tax even if liable
- Organised Crime
- Unreported income
- Alteration of document
Example of Tax Fraud
We can a classic real-life example of Walter Anderson. The details are as under:
- Anderson started his career in the telecommunication sector as a salesman in MCI Communications in 1979. He invested $ 100,000 for the foundation of Mid-Atlantic telecom in the year 1948. He founded Esprit Telecom Plc (in London) in 1992 & sold the venture in 1999 by earning a huge capital return. In 1988, he founded International Space University, providing a multicultural & multidisciplinary graduation course for space studies. He promoted the commercial development of many space programs, with the intention to resolve many challenges of the planet.
- The United States Government conducted an investigation of the businesses of Mr. Anderson through the years 2002 to 2005. He was alleged with hiding wealth in foreign countries.
- He was thus charged for tax evasions of around $ 364 million. He was arrested on February 26, 2005 at Dulles International Airport & sentenced for imprisonment for 6 years. He was also asked to pay for restitution amount to the government.
- He was released on December 28, 2012.
Types of Tax Fraud
Types of Tax Frauds
|Under-reporting of Income||
|Misrepresentation of figures||
|Claiming deductions even if you are not eligible||
How to Report Tax Fraud?
- IRS maintain confidentiality of the person reporting the tax cases. Hence, no status or progress update is provided by IRS.
- It has enlisted the types of frauds to be treated as tax frauds.
- IRS insist sending a formal letter with following minimum details:
- Name of the person or business for whom you are reporting
- Address of the person or business for whom you are reporting
- Social security number or Employer identification number for tracing the person or business.
- A brief description of the fraud.
- How you became aware of the fraud or the way you obtained the information.
- Years of suspected tax fraud.
- Estimated amount of unreported income.
- Your name, address & contact number.
- IRS also gives rewards for reporting the fraudulent activities. The relevant persons need to claim the reward by submitting form 211.
Tax Fraud Penalties
|Civil or Criminal Penalties||
|Cost of Prosecution||
|Payment of tax amount||
Some of the advantages are:
- Tax fraud cases enables the identification of existing loop holes in the tax laws & its provisions. It certainly identifies the action points to be taken by the government to not let such cases arise in future.
- Fraud cases enable stricter drafting of new tax laws by the government in future years.
- The government in anyway recovers the double of tax not received in fraud cases. Thus, revenue doubles.
Note: The advantages specified above are complimentary & not supplementary. Tax frauds. The advantages are positive sides of tax frauds. Tax frauds are not made for above advantages. These are done only with the selfish intention to increase own cash reserves at the cost of decreasing the availability of basic necessities of future generations.
Ideally, there should only be disadvantages of any fraud.
- The biggest disadvantage is that no court orders death penalty for fraud cases. This, in some way, motivates the potential tax fraud persons.
- More & more tax frauds are results of lack of stringent punishments.
- The government should disable the convicted person from doing business in future years. But no such punishments are usually given by any government.
- Another biggest disadvantage is that is lowered down the country’s growth rate.
- Weak tax provisions are identified only after the occurrence of frauds.
- It strongly demotivates the honest tax payers of the country.
The basic question arises is “who are responsible for the occurrence of tax frauds?” the answer is “everyone in the loop. ever person from the drafting of tax law to person witnessing the fraud is responsible.” the law maker is responsible for weak drafting of provisions. He is also responsible if he does not amend the provisions quickly with retrospective effect. Corrupt officers of government are at the centre for this fraud. The auditors of the fraudulent companies who did not raise red-flags for the fraudulent events. everyone in the loop is held responsible. tax frauds are the results of loopholes in tax provisions & weak tax collection system of the country.
This is a guide to Tax Fraud. Here we also discuss the definition and how to report tax fraud? along with advantages and disadvantages. You may also have a look at the following articles to learn more –