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Paul Tracy

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Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

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Updated August 12, 2020

What is Tax Fraud?

Tax fraud is the willful and intentional act of lying on a tax return for the purpose of lowering one's tax liability.

Example of Tax Fraud

For example, let's say John owns a painting business. As an employer, he dutifully withholds payroll taxes from his employees' paychecks. However, John fails to remit those funds to the IRS and instead uses the money for a vacation and a new car. One of his employees finds out about the activity and reports him using IRS Form 3949-A (though he could also send an anonymous letter to the IRS). The IRS investigates and determines that John has committed tax fraud, which is a felony.

Other examples of tax fraud might include deliberately underreporting or omitting income, making false accounting entries or keeping two sets of books, taking deductions that the taxpayer is not entitled to, claiming personal expenses as business expenses or hiding assets.

Why does Tax Fraud matter?

Tax fraud cheats the government out of millions of dollars a year. It is illegal and punishable by fines, penalties, interest, and/or prison time. It is important to note, however, that tax fraud generally requires willful and intentional activity for the purpose of lowering a tax liability, not mistakes or accidental misreporting.

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