Did you know that tax fraud costs the U.S. government $441 billion a year? That is nearly half a trillion dollars unavailable for social programs, infrastructure, and other services.

Tax fraud doesn’t just affect the government. It affects us all by draining resources that could benefit the community.

These fraudulent activities can have long-lasting repercussions, not only for individuals but also for businesses. But there’s a silver lining. The more you know, the better equipped you’ll be to protect your interests.

Keep reading to discover the knowledge you need to identify and avoid falling prey to these scams. This article outlines the most common types of tax fraud, how they work, and what you can do to protect yourself.

Identity Theft

Identity theft in the context of tax fraud is a particularly insidious form of deception. A scammer steals your information to file taxes in your name and collect your refund. They could obtain this sensitive data through phishing emails, hacking, or even old-fashioned mail theft.

The consequences of tax-related identity theft can be devastating and long-lasting. Victims often do not realize anything until they receive a notice from the IRS. Correcting these issues is time-consuming and can create financial and emotional burdens. Victims may also face delays in receiving their legitimate refunds or suffer damage to their credit scores.

Protecting yourself from identity theft starts with vigilance. Be cautious about sharing personal information, especially your Social Security number. Always secure your financial records and dispose of them properly by shredding them. Consider using multi-factor authentication where possible, and regularly check your credit reports for any suspicious activity.

False Deductions and Exemptions

This type of tax fraud involves inflating or fabricating deductions, credits, or exemptions to minimize tax liability. In other words, taxpayers claim expenses or exemptions that either don’t exist or aren’t as substantial as reported. These actions are a dishonest attempt to lower one’s taxable income and, thus, the amount of taxes owed.

False deductions include inflated charitable donations or exaggerated business expenses. Additionally, there may be attempts to claim personal costs as part of doing business. For example, some may report personal travel or claim an unusually high amount for unreimbursed employee expenses. While the IRS may not catch every minor discrepancy, they have mechanisms to flag unusual or excessive deductions.

Getting caught claiming false deductions or exemptions can lead to many complications. In severe cases, it can result in criminal charges, fines, and even prison time.

Income Underreporting

Income underreporting involves omitting or understating income on your returns to reduce tax liability. This crime occurs when someone refuses to report cash payments or hide revenue in other transactions.

Less severe cases include leaving out freelance work, yard sales, or informal arrangements. Small business owners might also “skim” by leaving out a portion of their daily take. More complex situations may involve offshore accounts, shell corporations, or intricate financial schemes.

A conviction for this crime can have severe repercussions. The IRS can audit your tax returns for up to six years. Furthermore, the penalties for this type of tax fraud can include hefty fines, back taxes, and interest.

Offshore Tax Evasion

Offshore tax evasion involves moving assets and funds to financial accounts in foreign countries to avoid taxation. These schemes often exploit international laws and wrap themselves in layers of legal complexity and secrecy.

It is legal to hold offshore accounts. Nonetheless, deliberately concealing these assets to evade taxes crosses the proverbial line.

Offshore tax evasion can take numerous forms but commonly involves trusts, shell corporations, or foreign bank accounts. Money flows out of the home country and into these accounts, effectively vanishing from the view of the IRS. What makes this practice illegal is the intentional act of hiding income.

The penalties are substantial and can include paying back taxes and steep fines. Some convictions result in imprisonment. The U.S. government and international organizations have ramped up efforts to combat this activity. For instance, the Foreign Account Tax Compliance Act (FATCA) increased reporting requirements for foreign institutions. Additionally, many countries have tax information exchange agreements.

Ask a Local Tax Attorney

Tax fraud comes in many shapes and sizes. Each has challenges and consequences, but knowledge is the first step toward prevention. Examining information you can trust will help protect your assets and your future.

Do not take chances when it comes to tax fraud. Professional guidance is available if you suspect you’ve been a victim or feel unsure of how to navigate regulations.

Take the first step towards safeguarding your financial well-being today by asking for a referral to a local attorney. You can reach our representatives 24/7 by calling (866) 345-6784 or completing our online form.

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