You're likely aware that tax fraud is a major threat to businesses, but you may be unaware of some of the reasons a return may be considered fraudulent. The top offenders of tax fraud are restaurant and clothing store owners, car dealers, salespeople, doctors, lawyers, accountants and hairdressers, as reported by FindLaw. Regardless of your industry, knowing how to avoid filing fraudulent tax returns can give you peace of mind that you are safe in the event of an audit.
What Constitutes Tax Fraud?
Filing fraudulent tax returns intentionally, by not reporting all income or falsifying information, is a criminal act. Authorities have to prove that the tax filer willfully provided untrue or incorrect information, and they did not simply make a mistake. If a return is flagged, an auditor will assess whether the errors uncovered were a result of negligence or fraud. Even if the error was a mistake, according to FindLaw, interest and penalties of up to 20 percent of the amount owed will be added to the tax bill.
According to the IRS, common examples of fraud in business tax returns include:
- misreporting of income or revenue,
- claiming invalid business deductions,
- keeping two sets of financial records to reduce liabilities,
- claiming personal expenses as business expenses or hiding assets.
The penalties for making fraudulent tax returns can be steep. In the United States, fines of up to $250,000 can be imposed for individuals — or $500,000 for companies — as well as a prison term of up to three years for those involved, according to the IRS.
Take Steps to Protect Your Company
The threat of tax fraud looms large in any business, whether an act is malicious or accidental. Here are some steps you can take to protect your company from fraud:
- Adequately protect financial information by using access controls, firewalls and anti-virus applications. Update your security patches and change your passwords regularly to further guard against tampering.
- If you suspect that an employee has been making unauthorized financial transactions or claiming expenses they are not entitled to, you should attempt to identify how much information and transactional capability that employee accessed. Look to records, such as emails, that might provide evidence of suspected wrongdoing.
- Conduct an external audit of your financial records to uncover activities that could be considered fraudulent, such as unreported revenue.
Using Third Parties
If tax preparation is not a part of your staff's core competencies, you should consider engaging the services of a third-party tax preparer. Make sure the preparer you choose is reputable and specializes in small businesses' unique needs. Even if a third party prepares your tax return, your company is responsible for attesting to its accuracy. The IRS provides some helpful hints for choosing an authorized tax preparer, and advises reviewing all returns carefully before filing.
An investigation by the IRS can prove costly if fraudulent activity is uncovered. Be vigilant and thoroughly check your tax returns for accuracy.
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