Tax evasion is neither new nor unheard of. In fact, it is so common, that several famous TV shows use tax evasion as a basis for its plot. Why, even the recent success of Schitt’s Creek is based on the concept that the Rose family loses its fortune due to an employee’s tax evasion.
So it is no surprise that there are several examples of tax evasion littered throughout history.
In this article, we will take a look at some of the most famous examples of tax evasion in the US history. But before we get to that, let us take a look at what tax evasion is and how people do it.
Methods of tax evasion
Let’s build on what we started in the introduction paragraph to explore the most common methods fraudsters use to evade tax:
Hiding income
All-cash businesses only accept cash from their customers. It’s hard to believe this when 84% of the payments in the US are cashless, but such businesses do exist. Sometimes with the ill-intention of not reporting tax. Accepting only cash from customers means leaving no trail or records – no proof of income, no tax. Accepting payments via cryptocurrencies is another way of evading tax. Unless the income earned through crypto is reported, it’s ‘cryptic’ for the government to trace the source of income and tax them.
Fake expenses and deductions
If an individual is residing in an X country and generates income from an investment made in a Y country, they are supposed to report that in X country. Any form of income that is deposited in an offshore account should be revealed to the tax collecting authority in the residing country. When individuals or organizations don’t do that, it’s treated as tax evasion and hiding money from the government.
Shell companies and nominee owners
Shell companies are entities that exist only on paper. The idea behind creating these companies is not to make profits by selling goods or providing services. They are only meant to be the owners of certain taxable assets for someone else. Individuals usually implement this idea to make it impossible for tax authorities to discover their real valuation. Tax evaders go a step ahead and appoint a person as a nominee. These nominees act as directors of shell companies which adds to the difficulty for the government to trace the real owners and thereby in tax assessment.
Famous tax evasion examples in the US
These examples of tax evasion will tell you how huge corporations like Enron and KPMG duped the IRS using sophisticated tax evasion techniques:
Enron Corporation
The Enron Scandal is a reminder of the aphorism, “All that glitters is not gold.” Such is the impact of this financial scandal that even after two decades, there are more than 10,000 searches on Google every month.
Fortune Magazine named Enron “America’s Most Innovative Company” for six consecutive years. At that time the Enron stock price was trading at $90 making it the apple of the eye of investors in the Wall Street.
But there was an ugly truth. They inflated the profits in their account statements and hid their billions of dollars of debts. They created Special Purpose Entities (SPE) as shell companies and transferred the assets and liabilities in the name of this company. This kept the investors from knowing the actual financial performance of the company. Enron also used the mark-to-market accounting method to show profits from long-term contracts that had not been completed.
WorldCom
At one point, WorldCom was one of the largest American telecom companies. Now, it’s known for committing one of the largest accounting frauds in the US, amounting to unpaid taxes of $79 billion. WorldCom grew rapidly by acquiring 30 competing companies in the telecom space. With a $186 billion market capitalization, they were riding high on their successful run.
Then the dot com bubble burst and the company had to cut down the spending drastically. Bernard Ebbers, CEO of WorldCom secured a loan of $408 million from the board of directors to meet the margin calls on loans. To hide the real financial performance of the company from investors, they manipulated the statements by capitalizing expenses as investments. Due to this, their income grew more than $ 3 billion and the net profit was $1.38 billion.
When the fraud was exposed, WorldCom filed for bankruptcy with a debt of $7.7 billion to its creditors. Ebbers was convicted on the charges of financial fraud and conspiracy, and sentenced to 25 years in prison.
KPMG tax shelter fund
The KPMG tax evasion scandal was exposed in 2003. KPMG helped wealthy clients to evade $2.5 billion in taxes. They agreed with the government to pay $456 million to avoid criminal prosecution. Jeffrey Stein, John Lanning, and Richard Smith – all three holding former senior positions in the KPMG tax services were among the nine individuals criminally indicted. But how did they commit the fraud?
They created four tax shelters called: BLIPS (Bond Linked Issue Premium Structure), FLIPS (Foreign Leveraged Investment Program), OPIS (Offshore Portfolio Investment Strategy) and SOS (Short Option Strategies). The role of these tax shelters was to generate phony tax losses. KPMG’s wealthy clients with a taxable income of over $10 million, showed these losses in their income statements to reduce taxable income. KPMG would charge fees as a percentage of the tax loss figure.
With the above common examples of tax evasion, we hope you have an idea about how tax frauds are committed. Let’s see how you can avoid tax evasion in your organization.
How can businesses avoid tax evasion
So if you don’t want to be the next ‘Roses’, here are five solid tips that will ensure you are on the right path and not resorting to tax evasion:
Maintain accurate financial records
Your financial records are like a character certificate for your business. When all your financial documents and tax forms are neatly arranged and organized, it reflects how serious you are towards your financial obligations aka paying taxes to the government. It also saves you from committing errors like forgetting to keep a record of an invoice.
Work with qualified tax professionals
Working with a tax professional is like building an extra security wall to your already secure financial records. Tax professionals have expert knowledge about the tax reforms and rules surrounding sales tax. If the government has recently amended a tax law that might affect your accounting, a tax professional is the best person to guide you and avoid tax issues. Moreover, they are adept at protecting your business from fraud trends and preventing them from happening.
Understand and comply with all tax laws and regulations
Working with a tax professional is a great move to keep your business safe from tax evasion. But this doesn’t mean you can get complacent and not have any knowledge about the tax laws and regulations, especially if you’re a small business owner. Attend workshops or webinars arranged by the business community to stay updated. It is essential to stay a step ahead because financial fraud is expanding rapidly and multiple fraud rings are operating to attack complacent businesses.
Implement strong internal controls to prevent fraud
Internal control is all about segregating duties and assigning power to key people in your organization so that every transaction takes place under their scrutiny. This reduces the chances of falling prey to fraudsters and staying away from tax evasion. Another step that you can take to establish is to conduct a regular internal audit. Internal audits will help you identify issues and take corrective actions.
Consider using fraud prevention solutions to identify suspicious activity
If you want to focus on your business, stay compliant with the tax laws, and pay taxes on time, investing in a fraud detection solution is your best bet. It cuts down the manual work and puts the fraud detection radar on auto-pilot. A human can’t check for fraudulent activities manually 24/7, especially with the sophisticated nature of the crimes. But these solutions are backed by advanced algorithms and machine learning models that continuously upgrade themselves to detect suspicious activities. Financial fraud detection software constantly monitors your business for identity verification, real-time transaction monitoring, risk assessment, deduplication, and more.
Takeaways
Tax evasion or tax fraud is a serious crime. Failing to meet the tax liabilities will have serious repercussions on your business. If you want to protect your business from tax evasion, then start maintaining financial records properly and working with a tax professional. This will save your business from paying hefty fines. But as a long-term solution, invest in fraud prevention solutions like HyperVerge to provide 360-degree protection to your business from all types of fraud.
FAQs
1. What is the difference between tax evasion and tax avoidance?
Tax evasion is using illegal means to avoid paying taxes to the government. It’s a form of tax crime that is done intentionally to lower taxes. Tax avoidance, on the other hand, is reducing tax liability by using legal means. It is done by claiming tax deductions as prescribed by the government.
2. What are the penalties for tax evasion?
If an individual is caught evading taxes or committing any form of tax fraud, then they have to pay a hefty fine to the government. If the income tax liability surpasses a certain level, then they can also be imprisoned. The average jail time for tax evasion in the US ranges from three to up to five years.
3. How can AML solutions help prevent tax evasion?
AML solutions constantly monitor your business for suspicious activities and detect fraud early on. This saves you from felony charges and keeps your business safe from fraudsters.
4. What are some red flags that might indicate tax evasion?
There are different ways individuals and businesses evade paying taxes, but here are the most common red flags:
- Underreporting income
- Not filing the tax return
- Discrepancy in reported income
- Showing fake expenses or deductions
- Creating shell companies
