Table of Contents
What is Tax Fraud?
Tax fraud refers to an illegal act where an individual or corporation freely and intentionally provides false information on their tax return or does not file a return at all, in order to reduce their liability. Essentially, retaining as much income or revenue as possible, even through illicit means, motivates entities to commit tax fraud.
In 2019, the Internal Revenue Service (IRS) used data from 2008-2010 to estimate the gross average tax gap. The number came out at $441 billion. Subsequent payments of around $60 billion, voluntarily made or via administrative enforcement, dropped the tax gap to $381 billion. This means around 17% of total tax revenue, the money used to run the government, has yet to be returned.
WHAT’S THE GROSS AVERAGE TAX GAP?
The gross average tax gap = total amount of money the IRS should receive via tax returns minus the actual amount returned
This calculation estimates how much money is missing from the system, not necessarily due to tax fraud (e.g. accidentally missing an extra zero for your income).
The Importance of Intent in Tax Fraud
You have probably realized it by now, but we’ll state it outright:
Tax fraud takes intent. If an individual or business does not deliberately commit tax evasion, then they have not actually broken the law.
Intent is a difficult thing to pinpoint, of course. Sometimes it’s impossible to know what someone was thinking at the time they committed the dubious act. So how can the IRS Criminal Investigation (CI) unit actually demonstrate an individual or business intended to commit tax fraud?
For an individual, the IRS must find evidence of the following to prove intent:
- Deliberate failure to file tax return
- Intentional failure to pay tax debt
- Falsification of the information on your tax returns (e.g. total income, overvaluing charitable donations, etc.)
- Misrepresentation of the actual state of their affairs in order to claim tax deductions or tax credits
For a business, the IRS must find evidence of the following:
- Deliberate failure to file payroll tax reports
- Intentional failure to report some or all cash payments made to employees
- Hiring an external payroll service that does not pass on the requisite taxes to the IRS
- Failure to withhold federal income tax or FICA (Federal Insurance Contributions) taxes from employee paychecks
- Failure to report and pay any withheld payroll taxes
The Zero Theft Movement is a crowdfunded effort to fight against the rigged economy and crony capitalism with hard proof gathered through citizen-led investigation. As a distributed organization, we firmly adhere to our policy of one-citizen-one vote. Regardless of who you are, how much you donate, or what company your work for or represent, you get one vote per investigation.
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Tax Fraud & Evasion vs. Negligence or Avoidance
Make sure not to mistake tax fraud with tax avoidance.
Tax avoidance refers to the legal practice of capitalizing on loopholes in the tax laws to reduce an individual or corporation’s tax liabilities. While not illegal, tax avoidance can sometimes feel unethical and/or exploitative.
For example, corporate investors can avoid paying considerable income taxes by having most of their money held in assets. Capital gains tax allows them to put off paying taxes until they sell an asset. While someone who makes $500,000 has to pay federal, state, and other taxes, an investor might have to pay only 20% for making the same amount.
From American Progress
The Tax Policy Center released a 2019 report showing that the top 1% received 75% of all profits made on capital gains. At the top of the top 1%, the 0.1% alone made 55.5%. This information suggests that the 20% cap on capital gains tax especially benefits those who can afford to invest a lot of money.
Another example is how businesses avoid paying corporate taxes by receiving tax breaks from the government. Mega corporations can afford to hire lobbyists who will serve as the former’s representative. Lobbyists, with their vast political network, can get meetings with the right politicians and try to get their employer’s interests prioritized.
The Institute of Taxation and Economic Policy (ITEP) conducted a 2019 study examining how much Fortune 500 companies paid in taxes. ITEP noted three key findings:
- 379 of the profitable companies studied by ITEP paid an effective federal income tax rate of 11.3% for FY 2018. That’s just above half the 21% statutory tax rate established by the Tax Cuts and Jobs Act.
- 91 corporations did NOT pay any federal income taxes on their income for FY 2018. ITEP claims “these corporations include Amazon, Chevron, Halliburton and IBM.”
- A separate 56 companies paid taxes on an average effective rate of 2.2%. All companies included paid between 0-5%.
If true, we’re talking about hundreds of multi-billion dollar companies paying close to nothing in taxes. This money won’t appear as part of the gross average tax gap because the government has left these gaping legislative loopholes. There’s a clear ethical grey area when it comes to tax avoidance. While it might be unethical, much of that behavior has yet to come under strict regulation.
DID YOU KNOW?
Some corporations, beyond paying only 7% of total taxes, sometimes take it a step further and practice tax evasion by depositing profits into accounts in offshore tax havens. In 2017, the U.S. Public Interest Research Group (USPIRG) estimated that “Fortune 500 companies [were] holding more than $2.6 trillion in accumulated profits offshore for tax purposes.”
IRS penalties
In the U.S., taxpayers are legally mandated to not only file their taxes but to also pay the correct amount of income, employment, sales, and excise taxes. An individual or corporation that deliberately fails to do so, therefore, is subject to criminal and civil penalties. The penalty differs depending on the type of tax fraud.
The following are a few possible punishments for specific types of tax fraud. It, by no means, includes all types of tax fraud and their consequent sanctions. We have quoted the legal language directly from FindLaw.
Attempt to evade or defeat paying taxes (26 USC 7201)
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Fraud and false statements (26 USC 7206(1))
“Upon conviction, the taxpayer is guilty of a felony and is subject to (1) imprisonment for no more than 3 years, (2) a fine of not more than $250,000 for individuals or $500,000 for corporations, or (3) both penalties, plus the cost of prosecution.”
Willful failure to file a return, supply information, or pay tax at the time or times required by law (26 USC 7203)
“Upon conviction, the taxpayer is guilty of a misdemeanor and is subject to other penalties allowed by law, in addition to (1) imprisonment for no more than 1 year, (2) a fine of not more than $100,000 for individuals or $200,000 for corporations, or (3) both penalties, plus the cost of prosecution.”
How the Zero Theft Movement Fights Tax Fraud
But why should you care about someone or some corporation committing tax fraud? How does that affect you?
Well, tax fraud reduces the government’s funds, which in turn limits the quality of and/or access to services that benefit the public. For decades, individuals have been paying around 89% of the government’s revenue(calculated from figures provided by USA Facts) while massive corporations have paid nothing on their revenues.
What can you do about it immediately? Enter the Zero Theft Movement.
Citizens author theft proposals and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
The ZTM community knows that many businesses, including some corporations, act ethically. We are trying to identify and expose crony capitalism and hold those involved accountable. That way, good people and businesses can properly thrive and enjoy the piece of the piece they’re all due.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.