Every year, tax professionals gear up for the annual tax filing rituals. Collating the documents, making meaning out of them, and ensuring that everything is done accurately. Tax season is chaotic in itself, but there is another aspect to it, the dark side – tax fraud. While there is one form of fraud where your firm or clients fall prey to scams, phishing, identity theft, etc, the other form is when your clients take charge of evading taxes.
In this article, Finsmart Accounting – globally trusted for outsourced bookkeeping services – will share everything about tax fraud so that you are better aware while bookkeeping and filing taxes. Let’s start by understanding what tax fraud is!
What is tax fraud?
If your clients have willfully and intentionally provided false information for a tax return to restrict the amount of taxes they should be paying, it is termed tax fraud. There are instances when citizens want to avoid the entire amount that they owe to the government. Whether your clients are individuals or businesses, anyone can commit fraud. They could be using a fake SSN or showcasing personal expenses as business expenses. They can even claim false deductions or not report some of the income at all.
Tax fraud is not a judgment error. When it comes to tax fraud or tax evasion, small matters take a bigger shape real soon. A false tax return or other related document can bring an individual under the radar of the IRS and if the information found is substantial, civil cases can turn into criminal tax investigations. Arrests and charges would not be so uncommon in such cases.
What are the signs of tax fraud?
– Purposeful failure to file income tax return
– False tax deduction or tax credit claims
– Failure to pay a tax debt
– Intentional failure to report income received
– Lies about dependants
– Claiming personal expenses as business
– Using a false SSN
– Being the preparer of a false report
If you do one or many of these things, your tax liability reduces way more than it should. While many might argue that it is the sole reason why people hire an accountant, the difference lies in whether the way is legal or not.
Recommended: Learn about accounting outsourcing services cost in India
Difference between Tax avoidance and tax fraud
Tax avoidance:
– It is a legal method to reduce the tax liability
– Examples include ensuring that an individual takes all their allowable business deductions to reduce business and income tax
– Another example includes claiming all credits to which they are entitled to avoid unnecessary tax bills
Tax evasion:
– It is an illegal method to reduce the tax liability
– It is when an individual or a business is trying to convince the IRS that they can’t afford to pay the tax debt
– You move money from your bank account into a family member’s account. This is known as hiding assets
Now that we know what tax fraud is and also its telltale signs, let’s discover the different types of tax fraud!
The different types of tax fraud
– Willful deferment from paying income tax: The IRS deals with several tax frauds every season, every year. While some of them are unintentional, many of them are on purpose. There are so many cases where what the government perceives as unintentional, in reality, is a serious offense. About 1 in 6 taxpayers fails to comply with the tax code. The only reason why all of them aren’t behind bars is that the IRS can distinguish between fraud and carelessness.
Without any proper evidence, the IRS assumes it is an honest mistake.
– Making wrong return claims: People might have a variety of opinions on what they owe and what they should owe. That doesn’t mean they do not have to pay what is owed to the government. Sometimes individuals and businesses are drawn toward making unreasonable claims to avoid tax payments. When a return is filled with a lack of reason, it invites trouble.
– Employment Tax Frauds: More often than not a criminal tax investigation happens against business owners or C-suite executives. There are situations when an employee steals from the employer and it is incredibly important for the firms to seek legal assistance in such cases. When a business fails to pay employment taxes, they are most likely inviting jail time. This type of tax fraud comes in different types:
– When an employer outsources their payroll responsibilities, it is known as “employment leasing”. In this mode of business, the business is responsible for collecting employment taxes from the outsourcing company. If a middleman tries to evade these employment taxes, it is categorized as tax fraud.
– When business owners withhold payroll taxes and use them as a means of tax evasion from the government, it is called pyramiding. When detected, it leaves a hefty penalty.
– Many times, employers make cash transactions to a vendor or another employment agency. It increases the opportunity for increased tax crimes. This makes room for false compensation laws, underreporting of the employees, etc.
– Tax preparer fraud: This is one of the most common and routinely scrutinized forms of tax fraud. This tax fraud is serious for the accused and clients. If the client is aware of the return being filed on their behalf and knows, it is trouble for all parties involved. As a tax preparer or an accounting firm owner, your team needs to be mindful of the documents that are available for filing a return. Sometimes it might not be directly your fault, but the IRS sees it all in the same light.
Recommended: Learn everything about tax season stress and tips for selfcare during peak season.
Penalties for tax fraud
The IRS is extremely particular about the rules and regulations. They are mindful of all filings and keep a special note to differentiate between intentional and unintentional behavior toward tax payments. If a client of yours has committed a tax crime, the punishment varies depending on the severity of the act. Sometimes it is a hefty penalty, and at other times it is a penalty combined with imprisonment.
A felony tax evasion can lead to a fine of $250,000 and $500,000 for corporations. Additionally, they can be subjected to up to five years in prison. Acts of a misdemeanor such as failing to file a return can lead to a penalty of $100,000 and $200,000 for corporations and up to one year in prison. In case, it’s a case of preparing a false return, the penalty is $100 per return for negligence. If it is a wilful understatement of tax, the penalty is $500.
Avoiding tax fraud this busy season
There is no reason why you or your clients should take tax return filing lightly. It is important for accounting firm owners, especially, to conduct a thorough scrutiny of the files that are being used to prepare tax returns for clients.
If the tax season has been overwhelming and you think there is a slight chance of error, you should consider outsourcing, where a team of experts takes thorough control and ensures that nobody faces charges, and yet clients get to save more on returns. Have more questions about outsourcing? Write to us at connect@finsmartaccounting.com.
Don’t forget to check out:
Outsourced financial controller on hire
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
