Tax fraud: Definition, types, and examples

What is tax fraud?

Tax fraud occurs when someone lies or cheats to avoid paying the right amount of taxes. It happens when people or businesses hide their income, claim false deductions, or use other tricks to pay less than they owe. The key factor in tax fraud is intent — it’s not just a mistake but a deliberate act to evade taxes.

Tax fraud's meaning is best explained through examples. If a business makes $100,000 but reports only $50,000, that’s tax fraud. Some people even invent fake expenses to lower their taxes. If someone hides money in an overseas account and doesn’t report it, that’s tax fraud too.

Governments rely on taxes to pay for essential services and infrastructure like schools, healthcare, and roads. When someone commits tax fraud, they aren’t just breaking the law — they’re making others pay more to cover the difference.

Legal consequences of tax fraud

Tax fraud can lead to an IRS criminal investigation, heavy fines, penalties, and even prison time. Punishments vary based on the amount involved and whether the fraud was intentional. Offenders normally must repay what they owe, plus interest and penalties.

In severe cases, tax fraud can result in criminal charges and years of imprisonment. Convictions may also lead to asset seizures, loss of business licenses, and lasting reputational damage.

How does tax fraud work?

Tax fraud is committed by deceiving tax authorities to reduce or avoid taxes. Some people hide income by taking cash payments and not reporting them. Others claim false deductions by listing personal expenses as business costs or creating fake companies to reduce taxes. Some businesses withhold payroll taxes by misclassifying employees as independent contractors.

Some tax preparers help clients in committing forgery, a crime known as tax preparer fraud. They underreport income, inflate deductions, or create fraudulent tax returns to get bigger refunds and take a cut. While many tax preparers follow the law, dishonest ones help taxpayers cheat the system for profit.

Technology makes tax fraud harder to catch. Some people hide money using cryptocurrency or offshore accounts. Others use special software to change financial records and make fake transactions look real. As tax enforcement methods evolve, so do the tactics people use to deceive the tax administration.

Tax fraud vs. tax evasion: The key differences

Tax fraud and tax evasion both involve cheating on taxes, but they are not the same. Tax fraud happens when someone lies on a tax return, for example by claiming fake deductions, hiding real income, or falsifying records. Tax evasion involves taking deliberate actions to conceal income or assets, often by not filing a return or using illegal methods to hide money.

If someone underreports income or inflates deductions, that’s tax fraud. If they don’t file taxes or hide money in secret accounts, that’s criminal tax evasion. Fraud involves lying within the tax system, while evasion avoids it altogether. Both are illegal and can lead to fines or jail time, but tax evasion is often more serious because it involves intentional efforts to disappear from tax records.

Common types of tax fraud

Tax fraud takes many forms, but all involve cheating the tax system to pay less than what is owed. Some of the most common types of tax fraud include:

1. 1.

   Income tax fraud

2. 2.

   Sales tax fraud

3. 3.

   Payroll tax fraud

4. 4.

   Property tax fraud

5. 5.

   Offshore tax fraud

6. 6.

   Falsifying business records

Income tax fraud

Federal income tax fraud happens when a person or business lies about their earnings to reduce their tax bill. Some underreport income by leaving cash payments off their tax return. Others inflate deductions by claiming fake expenses. In some cases, people use fake Social Security numbers to file fraudulent tax returns and collect refunds they are not entitled to.

Sales tax fraud

Businesses commit sales tax fraud when they collect sales tax from customers but fail to send it to the government. Some companies underreport total sales to lower their tax payments. Others avoid paying taxes by illegally selling products without charging sales tax at all. This fraud not only cheats the federal government but also gives corrupt businesses an unfair advantage over honest competitors.

Payroll tax fraud

Employers commit payroll tax fraud when they avoid paying taxes on employee wages. Some businesses pay workers in cash and fail to report those wages to dodge payroll taxes. Others misclassify employees as independent contractors to avoid tax responsibilities. This fraud harms workers by denying them benefits like Social Security and unemployment insurance.

Property tax fraud

Property tax fraud happens when a homeowner or business owner lies about a property’s value to lower their tax bill. Some claim their property is worth much less than it actually is. Others falsely list a rental property as their primary residence to get tax breaks.

Offshore tax fraud

Offshore tax fraud happens when people hide money in foreign bank accounts to avoid paying taxes. Some create shell companies or use complex legal structures to move income overseas and keep it hidden from tax authorities. Having a foreign account is legal, but failing to report it and using it to evade taxes is a crime.

Falsifying business records

Some businesses commit tax fraud by manipulating financial records to lower their tax burden. They may alter sales receipts, keep two sets of books, or fake expenses to make their business appear less profitable. This fraud helps them pay less taxes, but it also disadvantages honest businesses and deprives the government of necessary funds for public services.

Examples of tax fraud

Tax fraud takes many forms, from high-profile cases involving celebrities and corporations to everyday scams that quietly drain government funds. Below, we explore two major types of tax fraud: high-profile cases from the past and popular scams that continue to target individuals and businesses.

Famous tax fraud scandals

Some of the most infamous tax fraud cases involve public figures and major corporations. Al Capone, the notorious gangster, was convicted of tax evasion and sentenced to 11 years in federal prison. He was also fined $50,000, charged $7,692 for court costs, and owed $215,000 plus interest in back taxes.¹ Wesley Snipes, a Hollywood actor, served time in prison for failing to file tax returns.² Leona Helmsley, a billionaire hotel owner, famously declared, “Only the little people pay taxes” before being convicted of tax fraud.³

Corporations have also been caught manipulating their taxes. Enron, once one of the largest energy companies in the US, used fake financial statements to hide profits and avoid paying taxes.⁴ Volkswagen, in addition to its emissions scandal, faced accusations of underreporting income to dodge corporate taxes.⁵ These cases prove that even powerful individuals and companies are not immune to tax laws.

Tax fraud schemes today

While major fraud cases grab headlines, tax scams continue to evolve as fraudsters find more sophisticated ways to exploit the system. Still, phishing scams and identity theft remain two of the most common and dangerous tax fraud tactics today.

Phishing scams trick people into revealing sensitive tax-related information, such as Social Security numbers, bank details, or login credentials. Scammers often impersonate government agencies like the IRS (Internal Revenue Service) and use phishing emails, text messages, or phone calls to claim you have an issue with a tax return or refund. Victims who fall for these scams unknowingly hand over their personal data, allowing criminals to access their tax accounts and file fraudulent returns in their name.

Similarly, identity thieves may steal your Social Security number and other personal or financial information to file false tax returns and claim refunds before you have a chance to submit your return. Many victims only realize they’ve been targeted when they try to file their taxes and discover that someone else has already used their Social Security number. Criminals often obtain this information through data breaches, phishing scams, or the dark web.

Beyond phishing and identity theft, fraudsters use other tax schemes. Fake tax preparers promise large refunds but file false returns, steal refunds, overcharge clients, or misuse personal information for identity theft. Cryptocurrency tax fraud allows individuals to hide income using digital currencies, often exploiting blockchain technology to move funds anonymously, obscure transactions, or evade tax reporting requirements.

What to do if you’ve become a victim of tax fraud

Tax fraud can happen to anyone, and it often comes as a shock. You might try to file your taxes only to find out that someone else has already done it using your name. A scammer pretending to be from the IRS might pressure you into revealing personal details, or a dishonest tax preparer could steal your refund.

No matter how it happens, tax fraud can cause serious problems — but taking action quickly can help you regain control. If you think you’ve been targeted, follow these steps right away:

• Report the fraud to the IRS. If someone filed a tax return in your name or stole your refund, contact the IRS and submit Form 14039, Identity Theft Affidavit to flag the issue.
• Check your tax records. Get a tax transcript from the IRS to see if anyone has filed a return using your Social Security number.
• Monitor your credit. Place a fraud alert on your credit report and check for accounts you don’t recognize. Tax fraud can lead to bigger identity theft problems.
• Secure your personal information. Change passwords for tax and financial accounts. Turn on two-factor authentication for extra security.
• Ignore scam calls and emails. The IRS never calls, emails, or texts demanding payments. If someone claims to be from the IRS and pressures you, it’s a scam.
• Talk to a professional. If you notice that something is wrong with your taxes or that someone has filed a fake return, get in touch with a tax expert. They can help fix the issue and prevent future mistakes.

References

¹ Federal Bureau of Investigation. (n.d.). Al Capone. FBI. Retrieved February 14, 2025, from https://www.fbi.gov/history/famous-cases/al-capone

² US Department of Justice. (2006). Wesley Snipes and two others indicted on tax fraud charges. Retrieved February 14, 2025, from https://www.justice.gov/archive/tax/usaopress/2006/txdv06W_Snipes.html

³ New York Court of Appeals. (1989). People v. Helmsley. Casetext. Retrieved February 14, 2025, from https://casetext.com/case/people-v-helmsley

⁴ Federal Bureau of Investigation. (n.d.). Enron. FBI. Retrieved February 14, 2025, from https://www.fbi.gov/history/famous-cases/enron

⁵ Shah, A., Kalra, A., & Ohri, N. (2024). Exclusive: Volkswagen India unit faces $1.4 billion tax evasion notice. Reuters. Retrieved February 14, 2025, from https://www.reuters.com/business/autos-transportation/volkswagen-india-unit-faces-14-billion-tax-evasion-notice-2024-11-29/