The Menace of Tax Fraud: Protect Yourself and Your Business

The recent Bernie Ecclestone case has put the limelight back onto Tax Fraud which is the scourge of the global economy as governments are losing billions of dollars in potential tax receipts. This short article will explore what is Tax Fraud, how it is executed and above all the measures to prevent it.

Tax Fraud is a serious offence that involves deliberately and dishonestly misrepresenting financial information on tax returns to evade or escape tax a liability. It ranges from under declaring income and inflating deductions to hiding offshore accounts. Tax Fraud is dangerous as it undermines the tax revenue collection system that ultimately undermines government fiscal policy, especially for essential services such as on education and health. The author believes detecting and preventing Tax Fraud is essential to maintaining a fair and equitable tax system.

Form of Tax Fraud

It can occur in a variety of ways, but it usually involves the following:

1. Underreporting Income: This is one of the most common forms of Tax Fraud and includes failure to report cash income, not declaring all business or trading income, or hiding assets that generate income. Next time a tradesperson or a professional offers the reader their service at a reduced fee if they do not want an invoice this should set the alarm bells ringing. Or if an establishment only accepts cash and no credit card transactions then there is strong possibility that they are committing Tax Fraud by not declaring all their income.
2. Inflating Deductions: Unfortunately, individuals or businesses exaggerate deductions to reduce their taxable income and will consequently incur a lower tax bill. Inflating business expenses, overstating charitable contributions or falsely claiming tax credits are some of the favoured techniques.
3. Offshore Tax Evasion: Taxpayers such as Bernie Ecclestone may attempt to hide assets and income in offshore accounts to avoid detection. This involves creating complex schemes, shell companies and offshore trusts. Tax practitioners may argue that they are simply exploiting loopholes in the national Tax Code and are merely helping clients to avoid tax. However, intent is crucial and the accounting convention of substance over form should be applied.
4. Ghost Employees: Employers may engage in payroll fraud by producing ‘ghost employees’ that do not exist or misclassifying workers as independent contractors to evade pay roll taxes, but the latter has largely been shut down by the imposition of IR35 in the UK.
5. Falsifying Documentation: Tax Fraud is underpinned by the creation of false documents such as invoices or financial statements to support fraudulent deductions or tax credits or genuine schemes to help for example new businesses.

Strategies to Fight Tax Fraud

The author believes that preventing Tax Fraud requires a combination of taxpayer education, enforcement, and regulatory interventions. These are his top ten strategies to fight Tax Fraud:

1. A Simplified Tax Code / System: Complex tax laws can have unintended consequences such as encouraging Tax Fraud. Simplifying the tax code will undoubtedly make it easier for taxpayers to understand and comply with the law.
2. Electronic Filing: Electronic filing systems can assist in reducing errors and enhancing the accuracy of tax returns. This will also enable tax authorities to engage in superior data analysis and predictive analytics.
3. Public Education: Educating the taxpayers regarding their obligations and the consequences of Tax Fraud is vital. Public awareness campaigns can help people and businesses understand the importance of accurate reporting and enhance the social contract between citizens and their government.
4. Robust Enforcement: Tax agencies must maintain a strong enforcement presence to deter potential fraudsters. Indeed, tax audits, investigations and penalties for tax evasion can help create a deterrence effect.
5. Regulating the Tax Profession: Regulation of tax agents or preparers or tax accountants cannot be left professional bodies such as the Chartered Institute of Taxation. There must be mandatory ethics training and licensing requirements to ensure an optimal profession. It is interesting to note that the term ‘Accountant’ is not protected in the UK and a taxi driver can become a tax accountant with little or no training.
6. Stronger Identity Verification: Implementing strong identity authentication measures can deter identity theft and fraudulent tax returns filed on the behalf of others.
7. Punishments: White-collar crime such as Tax Fraud may not lead to blood on the carpet, but it has socio-economic consequences such as lost opportunities to improve the health of a nation or help it make advances in science and technology. Therefore, there should be strict penalties for Tax Fraud, such as heavy fines and lengthy prison sentences. Prosecuting high-profile cases such as Bernie Ecclestone’s Fraud sends a strong message that this will not be tolerated.
8. International Agreements: There should be greater cooperation and formal international agreements between countries to fight the menace of offshore tax evasion.
9. Leveraging IT: Governments need to invest in IT such as helplines and chatbots to better assist companies and individuals so that they can better comply with legislation and reduce unintentional mistakes. In Sweden all tax returns including the Prime Ministers are available online for scrutiny.
10. Whistle-blower Lines: These are cheap and effective for people to report Tax Fraud as long they are anonymous and incentivised.

Conclusion

Tax Fraud remains an important issue that wrecks the integrity of tax systems across the globe and potentially cause severe socio-economic distress. Detecting and preventing Tax Fraud requires a multifaced approach that requires cooperation between government agencies, individuals, and businesses. By implementing strong enforcement measures, raising public awareness, simplifying national tax codes / systems, and effectively using advanced technology, governments can deter Tax Fraud and facilitate a fair and equitable tax system that benefits society at large.