Tax Fraud

Tax evasion versus avoidance and the common tax fraud schemes, from unreported income to tax havens.

5 minutes 5 Questions

Tax fraud, in the context of the Certified Fraud Examiner (CFE) body of knowledge, refers to the willful and intentional attempt by an individual or business to evade or defeat a lawful tax obligation. It is distinguished from legitimate tax avoidance (legally minimizing taxes through planning) and…

Concepts covered
Income, Deduction and Taxpayer Identity SchemesConsumption Tax and Tax Haven SchemesTax Evasion versus Tax Avoidance
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CFE - Tax Fraud Example Questions

Test your knowledge of Tax Fraud

Question 1

Unlike a value-added tax, a retail sales tax is collected incrementally at each stage of the production and distribution chain, from the raw-materials supplier through to the final consumer.

Correct Answer: False

The statement swaps the two consumption taxes. A value-added tax is collected incrementally at each stage of production and distribution, with each business charging tax on its sales and claiming credit for tax paid on its inputs. A retail sales tax is collected once, at the point of final sale to the consumer.

Question 2

A fraud examiner reviewing a business owner's records finds two practices. First, the owner timed equipment purchases at year-end to claim deductions the tax law allows. Second, the owner told staff to deposit some customer payments into a personal account and leave them off the business tax return. Both practices lowered the tax owed. Which of the following BEST explains why only the second practice is tax evasion rather than tax avoidance?

Correct Answer: It involved willful concealment of taxable income

Tax evasion is the willful attempt to evade tax through illegal means such as concealing income. Diverting customer payments and omitting them from the return is deliberate concealment of taxable income. Timing equipment purchases to claim allowed deductions is lawful tax avoidance.
The size of the tax reduction does not matter, because legal planning can save more than fraud does. Involving employees does not decide the issue, since evasion can be committed by the owner alone. Moving receipts into a personal account is not illegal by itself. The offense lies in hiding that income from the tax authorities.
Key concept: willfulness and concealment separate illegal tax evasion from legal tax avoidance.

Question 3

A taxpayer who structures transactions to exploit a legal loophole commits tax evasion if the primary motive for the arrangement is to reduce tax liability.

Correct Answer: False

Using lawful means, including loopholes, to reduce tax liability is tax avoidance, even when reducing tax is the main motive. Tax evasion requires intentionally using illegal means, such as concealing income, falsifying records or claiming false deductions, to escape a tax that is legally owed. The distinction turns on whether the means are legal, not on the desire to pay less tax.

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