Types of Tax Fraud

Tax fraud covers a wide array of illegal activities. Here are some of the most common examples, along with real-life scenarios to illustrate them:

1. Underreporting Income: Deliberately leaving income off a tax return to pay less. A business owner only reports income received through official bank accounts, while keeping cash sales off the books.

2. False Deductions or Exemptions: Claiming deductions or exemptions that aren’t legitimate. A taxpayer fabricates medical expenses or charitable contributions to receive a larger tax refund.

3. Hiding Assets: Keeping assets in offshore accounts or under another person’s name to conceal them from the IRS. A celebrity uses a shell company to purchase a luxury vacation home and avoids taxes on the property.

4. Identity Theft: Using someone else’s identity to file a fraudulent tax return for a refund. Criminals steal Social Security numbers and other personal information to file fake tax returns for unemployment benefits.

3. Abusive Tax Schemes: Engaging in illegal tax avoidance strategies, often promoted by unscrupulous tax preparers. A tax advisor suggests a risky investment scheme that promises massive tax deductions but has little chance of success.

The Internal Revenue Service (IRS) relies on honest taxpayers to fund government operations and essential services. When someone cheats on their taxes, it undermines the system and places an unfair burden on the rest of us. If you have reason to believe someone is evading their tax obligations, reporting them to the IRS is the right thing to do.