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Do improper deductions on a business return constitute tax fraud?

People who own or manage small businesses are often eager to reduce their expenses and increase their profit margin. There are many ways for a business to keep costs low, and tax avoidance is often among those strategies.

Businesses can claim a wide range of deductions that can drastically limit their tax liability, while also strategically using assets and income for the same purpose. Tax avoidance is legal and beneficial for businesses.

However, some people misuse those deductions or maybe even outright lie in order to reduce tax liability. Intentionally manipulating the tax system through lies or misrepresentation to reduce what you should pay could constitute a crime. In those scenarios, the person who prepared the taxes or provided the information could wind up facing charges of tax fraud.

Despite popular opinion, the IRS does not turn a blind eye to businesses

Given that some of the biggest and most profitable companies in the world are able to structure their finances in such a way that they pay no federal income tax, those with minimal experience in tax preparation sometimes think that the government only pursues tax claims against individuals and not against businesses.

However, businesses can face the same kinds of allegations that individuals do from the IRS. It's just that those large businesses have become very good at working the existing rules and laws in their own favor.

Underpayment of taxes can occur for any business that has tax liability, and those who willingly misrepresent a company's financial circumstances commit the same kind of fraud often committed by individual taxpayers who claim dependents that don't exist or apply deductions that they realistically shouldn't receive in order to reduce how much tax they pay.

Businesses and professionals facing business tax fraud claims need to protect themselves

Once you face charges for tax fraud, the issue is no longer something easily resolved by simply paying the amount you owe. You will have to prove that you did not act with an intention to defraud the federal government or that the issue stems from a mistake, not a willful act of fraud, to avoid potential criminal consequences.

Careful analysis of your company's structure, financial records and tax records can help you determine the best strategy for defending against an allegation and resolving the issue before it damages your business.

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