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What is Tax Fraud?

Underreporting tax income is a form of tax fraud.
Committing tax fraud can lead to an arrest and possible prison time.
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  • Written By: Felicia Dye
  • Edited By: Heather Bailey
  • Last Modified Date: 03 October 2014
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Taxes are monies that individuals and businesses owe to governments. These amounts are usually obligatory, unless some type of exemption applies. Tax fraud occurs when an individual or business aims to cheat the government out of all or part of what is owed. People do this by keeping false records, underreporting tips or cash income, and concealing assets.

There are numerous types of taxes, including income tax and sales tax. There are also numerous governments to which taxes may be owed. These include county, state, and federal governments.

There are many methods people can use to commit tax fraud. With regard to income taxes, people may lie about how much they have earned. By claiming to have earned less on a tax return than a person actually earned, he can fraudulently lower his tax burden.

Some people may also claim exemptions and credits that do not apply to them. Exemptions are amounts that can be legally deducted from taxable income. Credits represent money the government offers to qualified parties. False claims of either of these items can constitute fraud because it fraudulently manipulates the amounts owed to the government or the amounts the government refunds.

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Tax fraud can also be committed in regards to other types of taxes. Counties, for example, often charge tax on personal property. To reduce the amounts owed, a person may try to conceal valuable items or illegally transfer them to avoid paying the correct amount of taxes. An individual or business does not have to be directly involved in the fraudulent actions to be accused of tax fraud. The party who owes taxes may be held liable for the acts of third parties such as accountants and lawyers.

Tax fraud can be handled as a civil matter. In these instances, a guilty party is generally ordered to pay the amounts due plus penalties and fines. Some or all of his assets may be seized to compensate the government he owes. Sometimes, however, tax fraud is pursued as a criminal matter. In these instances, a person can be ordered to pay criminal fines and may be incarcerated.

In the United States, federal tax fraud is investigated by the Internal Revenue Service (IRS). A person who suspects that someone is guilty of tax fraud can inform the IRS. Form 3939-A is used specifically for this purpose. Although the IRS does pursue anonymous tips, it should also be noted that in some cases, the IRS offers rewards to tipsters.

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