Tax Fraud: Detection and Prevention

Tax fraud occurs when an individual or a firm deliberately falsifies data on a tax return to reduce the amount of taxes owed or avoid paying taxes altogether.


In the U.S., taxpayers are required to file a tax return and pay the correct amount according to their respective incomes, deductions, etc.


Tax Fraud: Detection and Prevention


Examples of tax fraud include:

  • Failing to file an income tax return
  • Failing to pay taxes in full
  • Filing a false return
  • Failing to report all income


Tax fraud cheats the government out of millions of dollars every year. Individuals caught engaging in tax fraud can be subjected to fines, penalties, or prison.


Given that tax legislation in the U.S. is a complex compilation of laws, a lot of taxpayers can make careless errors.


Although mistakes attributed to negligence are unintentional, the government may still levy fines against taxpayers who fail to meet the full obligation of their tax liability.


Tax fraud is not the same as tax avoidance, which is the legal use of loopholes in tax law to reduce expenses. Although tax avoidance is not a direct violation of the law, it is frowned upon by tax authorities, as it may compromise the spirit of tax law.


Researchers claim that the total attempted refund fraud in 2019 was over $25 billion.


Generally, we can split tax fraud into a couple of different types.

  • Phishing – Phishing occurs when fraudsters send taxpayers fake emails or website links pretending to be from tax offices or other government authorities. The same term applies to requests for passwords, credit cards data, banking information, etc.
  • Tax preparer fraud – Tax preparer fraud occurs when tax clients receive emails that appear to be from their tax preparer asking them to update their online accounts with the intention of stealing their bank account or credit card numbers.


Detection of tax fraud


Cash expenditure method - this method is most commonly used for surveillance of tipped employees and is combined with statistical analysis to determine what employees' actual salaries are. Given the uncertainty of this method, it's unlikely to be used in criminal prosecutions where guilt must be established with accurate and indisputable evidence.


However, it is recommended for adding another layer of fraud detection.


Over time, new methods of control and verification based on technologies like machine learning and blockchain have emerged.


One of the most valuable uses of technology is customized solutions. With sufficient data, any surveillance or security entity can obtain technology-based resources to protect against theft and fraudulent losses.




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