Tax fraud occurs when someone intentionally falsifies the information on a tax return in order to reduce his tax liability. A business is considered to have engaged in tax fraud when any of the following conditions are present:
It has failed to file a payroll tax report
It has not withheld social security taxes from employee pay
It has not forwarded to the government withholdings made from employee pay or any related matching amounts
It has failed to report cash payments made to employees
It has not filed a corporate income tax return
It has incorrectly stated the amounts on its income tax return
It has not paid its calculated income tax liability
Many people are more likely to engage in tax fraud than in other types of fraud, because there does not appear to be a victim – the government merely collects less income, which results in the tax burden being spread across a large number of people. However, the effects are pernicious, since the impact on other parties will eventually involve one or more of the following effects:
Future tax rates must go up to ensure that adequate taxes are collected.
Government services must be reduced, since there are fewer funds to pay for them.
Future generations of taxpayers will be burdened with the debt that the government took on to pay for the tax shortfall.
The rate of tax fraud increases substantially when an organization conducts the bulk of its business in cash, since these transactions can be quite difficult to track down. Conversely, when transactions have a strong audit trail, taxpayers are much more likely to report the correct amounts of taxable income. Many instances of tax fraud occur in gray areas where taxpayers seek to overstate the amounts of their credits, deductions, and exemptions, typically in such areas as business entertainment, automobile usage, and charitable donations.
There are several additional effects that influence the level of tax fraud. One is a sense of duty to the community, where a taxpayer is willing to pay taxes in order to ensure that the government operates properly, allowing it to generate the services expected of it by citizens. When there is a sense that government services are beneficial to the populace, they are less likely to engage in tax fraud. Conversely, if the rich feel that they are paying an inordinate amount of taxes in exchange for what they receive back in services, they will be more likely to engage in tax fraud, so that they can retain more of their earnings.