Business Owners & Officers Beware: Top Five Tax Fraud Techniques

Oftentimes business owners and officers encounter a blurry line between legitimate tax avoidance and illegal tax evasion. Corporate officers should be able to identify tax evasion and report this fraud. Here are common business owner criminal tax evasion techniques to look for:

1) Intentionally Under-Reporting or Excluding Income

This is basic tax fraud. Common examples include a business owner’s failure to report part of a day’s receipts or a landlord failing to report rent payments.

2) Personal Expenditures in Company Income Statements

The majority of privately held American companies are formed as pass-through entities including S corporations, LLCs, and partnerships. A pass-through entity means the income from the company is passed to the owners, who are then taxed at personal rates.

To fight high taxes many business owners aggressively attempt to reduce their rates. Some treat their companies as alter egos, concealing personal and family expenditures within their company’s income statements. Personal expenses hidden into company income statements can include expenditures for their family’s residence such as repairs, legal expenses such as estate planning, and even personal hobbies such as golf club memberships.

3) Mislabeled Transactions

Occasionally business owners try to label a transaction as something it is not. One common technique is to mislabel corporate dividends as “interest” in an attempt to qualify for a deduction.

4) Irregular Bookkeeping Techniques

Most accounting irregularities, be it a business’ failure to keep sufficient records or the existence of two sets of books, crosses the line into tax evasion. Oftentimes, fraud occurs when a there is a discrepancy between the amount reported on a corporations’ return and amounts reported on the business’ financial statements.

5) Unqualified or Exaggerated Deductions

Examples include unverified charitable deductions, overstated travel expenses, and compensation paid to family members for work that did not occur


 Relevant Statutes & Penalties*

Title and Section

Definition

Title 26 USC § 7201

Attempt to evade or defeat tax

Any person who willfully attempts to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof:

  • Shall be imprisoned not more than 5 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both, together with the costs of prosecution

Title 26 USC § 7202

Willful failure to collect or pay over tax

Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to penalties provide by the law, be guilty of a felony

  • Shall be imprisoned not more than 5 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both , together with the costs of prosecution

Title 26 USC § 7203

Willful failure to file return, supply information, or pay tax

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof:

  • Shall be imprisoned not more than 1 years
  • Or fined not more than $100,000 for individuals ($200,000 for corporations)
  • Or both, together with cost of prosecution

Title 26 USC § 7206(1)

Fraud and false statements

Any Person who… (1) Declaration under penalties of perjury – Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; shall be guilty of a felony and, upon conviction thereof;

  • Shall be imprisoned not more than 3 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both, together with cost of prosecution

Title 26 USC § 7206(2)

Fraud and false statements

Any person who…(2) Aid or assistance – Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the Internal Revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; shall be guilty of a felony and, upon conviction thereof:

  • Shall be imprisoned not more than 3 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both, together with cost of prosecution

Title 26 USC § 7212(A)

Attempts to interfere with administration of Internal Revenue laws

Whoever corruptly or by force endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, upon conviction:

  • Shall be imprisoned not more than 3 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both

Title 18 USC § 371

Conspiracy to commit offense or to defraud the United States

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each:

  • Shall be imprisoned not more than 5 years
  • Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • Or both

*Source: IRS Related Statutes and Penalties – General Fraud

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