This paper will discuss the topic of tax fraud. We will begin by introducing the basic concepts of tax fraud. Secondly, this paper will also delve into some of the laws that have been passed as punishment for those parties that decide to commit tax fraud. We will also highlight some of the more current examples of tax fraud that have been committed and the details that lead to the perpetrators being caught. Lastly we will discuss the role that criminal investigators have in the realm of tax fraud. Tax fraud can be stated simply as: willfully supplying fraudulent information on tax returns to the Internal Revenue Service (IRS).
As we know, no one is perfect and mistakes are made quite often, but the operative word in this definition is ‘willfully’. If an individual knowingly and willfully lies on their tax returns, particularly stated income, then tax fraud has been committed. On page 567 of our text it states, “Tax fraud can be committed against any governmental or other organization that collects taxes, including the federal government, state governments, local governments, or other taxing authorities. The types of tax frauds committed against all of these organizations are similar.
With this being said, as long as there have been taxes, there have been those who find ways to avoid paying them. The most commonly misstated part of a tax return is the amount of income reported. Since taxes due are based on the amount of income reported, it is easy to see how not reporting certain amounts of income would lower the tax liability. Another way to avoid paying taxes is to improperly claim deductions that are authorized. Some basic examples would be the lawn-care professional “forgets” to claim $15,000 of part-time summer landscaping work or the individual who falsely claims $10,000 of charitable contributions.
One thing to keep in mind is the difference between tax fraud, also known as tax evasion, and tax avoidance. As stated earlier, tax fraud/evasion is illegal; it is misstating information to any taxing authority. Tax avoidance, on the other hand, might help lower the tax liability, but it is done legally. Tax avoidance is when tax payers set up with financial affairs in such a way to limit their exposure to tax. This can be done by using charitable contributions, participating in an employer sponsored retirement plan, taking allowable credits, or even the use of tax shelters.
Even though the concepts that differentiate between tax fraud and tax avoidance might seem clear in theory, they are far more difficult to see when dealing with high net worth individuals and companies, both seeking to pay as little tax as possible. There are many different kinds of fraud, tax fraud being one of them, and there are also many kinds of tax fraud in and of itself. To combat the many versions of tax fraud, there have to be laws and statutes aimed to give punishment to those parties that commit tax fraud. The first example of a law is for those individuals who attempt to evade taxes.
Evading taxes is a felony and comes with severe penalties. This comes with a penalty of no more than 5 years in prison and/or fined no more than $250,000 for an individual. Another law is for those individuals who willfully fail to collect or pay over tax. This also comes with a penalty of no more than 5 years imprisonment and/or a $250,000 fine for individuals. The third example is willfully failing to file a tax return, supply information, or pay a tax. This comes with a penalty of imprisonment of no more than one year and/or a $100,000 fine.
The next example is a law against interfering with the administration of Internal Revenue laws. This comes with a penalty of no more than 3 years imprisonment and/or a fine of $250,000 for individuals. The last example has to do with those tax evaders who conspire to commit offense or to defraud the United States. Again, this comes with a penalty of no more than 5 years in prison and/or $250,000 fine for individuals. Along with these examples, there are many more that can be listed. Current Fraud Schemes There have been many famous tax fraud cases over the years.
The ability of individuals to consistently find ingeniously creative ways of committing tax fraud, especially with the magnitude of rules and regulations concerning tax, is astounding. Every year there are thousands of instances of tax fraud schemes taking place, accounting for billions of dollars of lost revenues for the IRS. In 2011 alone, the IRS reported roughly 2 million potentially fraudulent tax returns out of over 145 million tax returns filed. (htt) In addition to highly sophisticated tax fraud schemes, sometimes very simple schemes are able to exist without interference.
Of the approximately 2 million fraudulent tax returns filed in 2011, identity theft accounted for about 450,000. (htt) In Tampa, FL for instance, identity theft for the purpose of filing fraudulent tax returns has become more and more prevalent. (htt1) Law enforcement bears witness to thousands of people annually in possession of ledgers, tax filings, lists of SSN’s and personal information, and refund debit cards. However, law states that it is not illegal to simply possess this information, only to use it.
Lack of ascertainable proof has forced the police department to allow hundreds of perpetrators go free, creating a very frustrating situation for everyone involved. Similarly, there has been a recent surge in the identity theft of Puerto Rican citizens’ information. Since Puerto Ricans are not required to pay U. S. income taxes on monies not earned within the U. S. , criminals are filing false claims to the U. S. to obtain refunds. Another type of fraud that has significantly plagued the U. S. is avoiding taxes by hiding money in offshore accounts.
To help combat this, the IRS has launched three voluntary disclosure programs since 2009, the latest of which was released just this past January. They promise tax evaders reduced penalties with no jail time for coming clean about their offshore accounts. Since their creation, these disclosure programs have netted the IRS upwards of $5 Billion in back taxes, interest, and penalties. (htt2) IRS Criminal Investigation (CI) employs approximately 4,100 employees worldwide, and is the only federal agency with investigative jurisdiction on violations relating to the Internal Revenue Code.
CI focuses on a wide array of frauds in addition to the two mentioned earlier as well, including: bankruptcy, corporate, healthcare, insurance, financial institution, Bank Secrecy Act (BSA), international, nonfiler enforcement, and abusive return prepared enforcement, to name just a few. CI special agents are trained and highly skilled in analyzing complex financial records and transactions, conducting interrogations and using forensic technology to gather incriminating evidence. Because of this expertise, CI’s conviction rate is among the highest in federal law enforcement.
IRS Criminal Investigation has a very specific role in fighting against all crime related to financials, not just tax fraud specifically. One aspect I find very intriguing and important is something the IRS Criminal Investigation unit has implimented called the ABP, which can be found right on the IRS website. The Annual Business Plan is a specific goal oriented guideline and plan for criminal investigation. The business plan currently in affect is from 2009 until 2013, and the main and highest priority of criminal investigation is to serve and enforce the tax laws of the country as well as support tax administration.
The overall sum up of the business plan is three main priorities of criminal investigation in order of importance: core mission tax, other financial crimes such as money laundering, terrorist financing investigations, and currency violations, as well asnarcotics related financial crimes. The criminal investigation business plan also covers four other main areas and those are: enforcement strategies, Fiscal year operational priorities, business strategies, and communication strategy. Fiscal year 2012 operational priorities is a section we find very important and pertenant.
Underneath the operational priorities section falls various types of specific detailed areas. Along with each of these headlines is many details and overviews, and they can be found all on the IRS website. The first area they cover is international tax fraud, specifically focusing on offshore tax evasion. A voluntary disclosure program offers noncompliant taxpayers to get back into the system. Return preparer fraud is next and this highlights investigation fraudulant returns of preparers.
The next focus is refund crimes investigating through programs such as Questionable Refund Program (QRP) and Return Preparer Program (RPP). A fraud referral program which focuses on education of new hire investigators. Bank secrecy act uses data to identify legal and illegal source tax cases. Organized crime drug enforcement task force (OCDETF) is in place to disrupt and eliminate major narcotics trafficking and money laundering involved in these acts. Counterterrorism pursues financial terroristic leads and works along with other units, one being the FBI.
Lastly, asset forfeiture is when criminal investigation uses asset forfeiture athourity to ultimately take away profit incentive from criminals. The IRS website contains a great amount of statistical data related to the success of criminal investigation. One chart shows the last three fiscal years, and the rate of convictions to the amount of cases initiated. It may not seem to be a drastic percent change from 2009 until 2011, but the fact is there is a steady increase and rise to the percentage of convictions and criminals sent to prison.
The increase every year: 81. 2% in 2009, 81. 5% in 2010, and 81. 7% in 2011, shows the determination and the successfulness of the business plan that they have implimented. Overall the IRS criminal investigation unit is doing an impeccable job at eliminating and reducing as much tax crime as possible. The truth is that tax fraud is more prominent today than ever through technological possibility and accessibility, and criminal investigators are growing just as rapid at convicting criminals.