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.

Ask an Expert about Tax Fraud

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Tax Fraud.

Be the first to ask a question

If you have a question about Tax Fraud, then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.