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Texas business owner arrested on charges of tax fraud

Owning a business requires sound record keeping when tracking expenses. Whether filing a corporate return or a schedule C on your individual return improper deductions designed to lower personal income may lead to a tax fraud investigation.

This week, a federal court in Texas unsealed an indictment against the owner of a corporation. Allegations contained in a four-count indictment claim the owner made willful and material false statements on his personal tax return.

The charges cover federal income tax returns from 2007 to 2010. He purportedly under-reported the income he earned during these years.

Penalties if he is found guilty of the charges include up to three years in prison. A civil fine of up to $100,000 for each count is also possible.

There are many categories of legitimate business expenses, including auto expenses, professional fees, travel, business entertaining, purchases of equipment and advertising. This is not a complete list, but documentation for all of these expenses is necessary.

Creative deductions or the use of business profits to pay for personal expenses can cause problems. For example, it may be questionable for the business to cover the mortgage on the owner’s vacation home as a business entertaining expense, if mostly used by family and friends. 

Under-reporting of income by small businesses is a major contributor to the tax gap. The IRS knows this and the chances of a tax audit increase if you own a business. If 1099s provided by those you do business with do not match up with the income you report, explain the discrepancy. Ask for corrections when there is an error.

When the IRS contacts you with questions, a tax attorney can provide valuable advice and help to build a defense through a tax audit or criminal investigation.

Source: Laredo Sun, "Corporation Owner/CEO Charged with Federal Income Tax Fraud," July 16, 2014.

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