Tax fraud happens when individuals or businesses intend to report their income or expenses falsely in order to avoid paying their tax liability. It is different from tax avoidance.
We regard tax avoidance as an accidental mistake which means individuals or businesses do not intentionally claim false financial information. Under this circumstance, the taxpayers only need to pay the penalties to make up their mistakes.
In the United States, tax fraud is considered as a violation to regulations set by the Internal Revenue Service (IRS). The IRS claims that there are two different types of tax fraud.
The first one is general civil tax fraud. Individuals or businesses understate their income to pay fewer taxes. The most common ways are to pay by cash in order to avoid reporting and to use two bookkeeping methods to claim the fund flows.
As for the second type, it is much easier to understand. When someone doesn’t cooperate with the IRS during an audit or fail to file the tax requirement without a reasonable excuse, he will be imposed a fine of 5 percent per month based on the amount he failed to pay. However, if the individual refuses to pay this penalty, the failure to file will be regarded as fraudulent. IRS regulates that the penalty should increase to 15% per month with a 75% maximum total penalty in this situation.
Tax fraud threatens the stability of our society. Individuals will be charged fines, penalties, interest or even prison time. Tax fraud costs the government millions of dollars every year to offset the loss of governments. Without this part of funds, governments do not have enough money to invest in infrastructure, city-building and people’s livelihood.