You're worried about tax fraud allegations. You dread having an IRS agent knock on the door. Every year that you file your taxes, it's hard to fight down the stress and anxiety.
The first thing you should know is that you must intentionally commit fraud. An honest mistake isn't fraud. Doing something to intentionally mislead the government is.
That doesn't mean a mistake won't lead to allegations if it appears intentional, however, but intent is a huge difference between the two cases.
To help you better understand the situation, here are five examples of potential fraud when done intentionally.
1. Keeping payroll taxes
Business owners are supposed to pull out payroll taxes and send them to the IRS. Employees expect to see these taxes deducted. However, the owner then has an obligation to turn these withheld earnings over to the government. If he or she decides to spend them on a vacation to Italy instead, that's tax fraud.
2. Omitting income
A business owner has two major accounts, which make up 90 percent of his her income. For tax purposes, the owner just reports these two income streams. Other work gets done "under the table" and that income never gets reported.
3. Underreporting income
This is similar to the above, though it may just include adjustments to the totals. For instance, perhaps those two accounts each bring in $400,000 annually. The owner reports them as $300,000 each and alters the paperwork to reflect it, keeping the other $200,000 without reporting it. Even if the owner is honest about every accounts' existence, reporting incorrect earnings could still count as fraud.
4. Taking false deductions
Business owners can use a lot of deductions, but they do face an obligation to only claim those for which they really qualify. Taking extra credits to which they're not entitled in order to reduce the total taxes owed could constitute fraud. For instance, if the government offers a tax credit for energy efficient implementations, the owner can't claim it without actually making the changes at the company.
5. Writing off personal expenses
Likewise, business owners can write off many expenses that are necessary for the company to function. They can't write off expenses that they personally incurred, attributing them to the business. For instance, if the owner takes that trip to Italy as a vacation with his or her family and then writes it off as a business trip, despite not having done any business, that could be a red flag to the IRS.
Those who are facing allegations of tax fraud must know what really constitutes fraud, what red flags the IRS looks for and what options they have moving forward.