Tax Fraud Taxes, Tax Laws

Tax Fraud

Taxes, tax laws and tax obligations are essential to maintaining a society and civil order that are functional, healthy and progressive. Taxes are the primary source of revenue for the operation of our government and for its performance of various public and civic services as well as for its maintenance of basic infrastructure, public labor and poverty assistance. It is for this reason that the prevention, detection and prosecution of tax fraud are collectively of the utmost importance. It is incumbent upon us as a nation and a society to protect this source of revenue from undue deception, avoidance or subversions. This helps to underscore the discussion hereafter, which defines, evaluates and discusses the implications of tax fraud.

First, it is appropriate to identity those forms which are most commonplace. According to del Llano (2011), the most common ways in which tax filers undermine the Internal Revenue Service (IRS) include instances in which the respondent; "omits reporting income earned in any foreign stock exchange [or] participates in bogus income tax shelters scams." Additionally, del Llano indicates that tax fraud has occurred when the tax filer can be illustrated to be guilty of "hiding or transfering assets or income out of the U.S.; Overstating the amount of deductions; Omitting income made from cash transactions; Making false entries in books and records; Personal expenses as business expenses; Claiming false deductions; Underreporting income earned by employees who receive tips; Paying its employees with cash; [and] Keeping two sets of books." (de Llano, p. 1)

Each of these acts creates a scenario in which the payer has dishonestly attempted to hide or disguise certain tax debts. The result is that the payer has deprived his or her municipality, state and federal governments of the revenue crucial to maintaining the business of the people. Daily (2010) indicates that, in fact, this type of behavior is remarkably common and that the tendency to report one's taxes dishonestly, while illegal, is often encouraged by the perception that modest distortion of one's earning is likely to go undetected. As Daily indicates, this impression is not too far from the truth. According to Daily, "in a recent year, however, only 2,472 Americans were convicted of tax crimes -- .0022% of all taxpayers. This number is astonishingly small, taking into account that the IRS estimates that 17% of all taxpayers are not complying with the tax laws in some way or another. And the number of convictions for tax crimes has decreased over the past decade." (Daily, p. 1)

This should hardly be seen as an indication that people are somehow less likely to commit tax fraud today. To the contrary, in the current age of recession, we find that the resources available to the government to seek out and prosecute tax offenders have largely been depleted. This prevents us from engaging a more aggressive and consistent oversight of the American taxpayer. What's more, it creates a scenario in which depleted federal revenue only begets a less ability to collect further revenue through taxes. While we are inclined to think of tax evasion and other such tax offenses as crimes of which corporations are typically guilty, especially in this era of corporate scandal and collapse, Daily reports that in fact, "according to the IRS, individual taxpayers do 75% of the cheating -- mostly middle-income earners. Corporations do most of the rest. Cash-intensive businesses and service industry workers, from handypeople to doctors, are the worst offenders. For example, the IRS claims that waiters and waitresses underreport their cash tips by an average of 84%." (Daily, p. 1)

This means that everyday Americans -- many of whom are likely to be drawing fairly modest earnings -- engage regularly in some form of minor tax fraud. Still, in these instances, it is important to differentiate between fraud and negligence. Where individual taxpayers are concerned, the abstruseness and complexity of filing one's taxes can have the impact of obfuscating the legal imperatives driving one's filing obligations. This means that an individual may report his or her taxes inaccurately but without the intention to commit fraud. According to Daily, "Although auditors are trained to look for fraud, they do not routinely suspect it. They know the tax law is complex and expect to find a few errors in every tax return. They will give you the benefit of the doubt most of the time and not go after you for tax fraud if you make an honest mistake. A careless mistake on your tax return might tack on a 20% penalty to your tax bill. While not good, this sure beats the cost of tax fraud -- a 75% civil penalty. The line between negligence and fraud is not always clear, however, even to the IRS and the courts." (Daily, p. 1)

This distinction aside -- and despite the fact that most tax fraud events occur in the hands of private citizens -- certainly corporate tax fraud accounts for the largest sums of money hidden, incorrectly filed and generally withheld from the federal government. Incidences such as those involving Enron, Worldcom, Tyco and Adelphia, among others, demonstrated beyond a reasonable doubt that without proper oversight and scrutiny, corporations have the capacity to be by far the worst offenders. In their respective cases, these firms employed widespread accounting irregularities in order to hide their earnings from the government or in order to over-report their earnings as a way of falsifying stock values. In these instances, the consequences were substantial, with the companies in question filing for bankruptcy, announcing their closure or seeing their top personnel stand trial for tax crimes. One common way, del Llano reports, that executives for top-flight firms will commit tax fraud is by 'offshoring' their earnings to keep them hidden from the government. According to del Llano, "any highly compensated professional persons and business owners in the U.S. are being solicited to participate in "offshore deferred compensation plans." The U.S. taxpayer is encouraged to sever an existing employment relationship and substitute an arrangement in which the nominal employer is a foreign "employee leasing" company. The supposed result of this abusive arrangement is that the taxation of a large portion of the professional's or business owner's salary is deferred while he/she gains immediate access to the funds through loans or offshore-based credit cards." (del Llano, p. 1)