Fake Exports, Phantom Invoices, and Digital Coins: Tax Fraud in the Age of Innovation

Top 10 Methods of Tax Frauds You Need to Know in 2025

Tax fraud refers to the illegal act of deliberately misrepresenting or concealing information to reduce tax liability or obtain tax benefits unlawfully. The key difference between tax avoidance and tax evasion lies in their legality. Tax avoidance is the legal practice of using legitimate methods to minimize tax liability. On the other hand, tax evasion involves illegal actions, such as falsifying records or hiding income, to reduce tax liability. Here are the top 10 methods of tax frauds that every compliance professional should know.

Underreporting of Income

Underreporting of income occurs when individuals or businesses intentionally declare less income than they actually earn to reduce their tax liability. This may involve failing to disclose cash earnings, foreign income, or side businesses. It is a form of tax evasion and can trigger penalties, interest, or criminal prosecution if discovered. Tax authorities often use data matching and audits to detect such discrepancies.

Fictitious Deductions & Credits

This fraud involves claiming deductions, exemptions, or tax credits that the taxpayer is not eligible for. Examples include inflating charitable donations, inventing business expenses, or misusing education or child tax credits. These false claims reduce taxable income or increase refunds fraudulently. Tax authorities closely scrutinize high deduction claims, especially when they don't align with reported income.

Tax Refund Fraud

Tax refund fraud typically involves filing false tax returns using stolen or fake identities to claim illegitimate refunds. Fraudsters may exaggerate income, falsify dependents, or invent withholding details to generate large refunds. This is a serious offense that undermines the integrity of the tax system. Governments have tightened verification processes to combat such fraud, including multi-factor authentication and income matching.

Concealing Assets & Income

This form of fraud involves hiding income sources or assets, often offshore, to avoid taxation. Individuals may use shell companies, trusts, or complex ownership structures to obscure ownership. It is common in high-net-worth tax evasion cases and often violates both tax laws and anti-money laundering regulations. Global initiatives like the Common Reporting Standard (CRS) aim to uncover such hidden wealth through cross-border information exchange.

Wrong Availment of Input Tax Credit (ITC)

This fraud involves claiming Input Tax Credit without actually receiving the goods or services or without having proper documentation. Some taxpayers claim ITC based on fake invoices from non-existent or shell suppliers. Such fraudulent claims reduce their GST liability illegally. GST departments use invoice matching and e-invoicing systems to detect such irregularities.

Short Payment of GST Than Actual Liability

This occurs when a taxpayer deliberately pays less GST than what is actually due, by underreporting sales, misclassifying goods/services into lower tax slabs, or not including certain income streams. It distorts tax collection and gives an unfair advantage to defaulters. Regular audits, data analytics, and reconciliations with e-way bills and returns help catch such discrepancies.

Fraudulent Availment of IGST Refund on Export of Goods

In this fraud, exporters claim refunds of Integrated GST (IGST) on zero-rated exports without actual export taking place, often using fake shipping bills and invoices. Some also inflate export values to claim excess refunds. This not only causes revenue loss but also violates export-import and customs laws. Authorities conduct detailed scrutiny and verification before issuing such refunds.

Non-Payment of Tax under Reverse Charge Mechanism (RCM)

Under RCM, the recipient of certain goods or services is liable to pay GST instead of the supplier. Fraud arises when recipients fail to discharge their GST liability under RCM, often citing ignorance or misclassifying transactions. This disrupts tax flow and compliance. GST law mandates proper documentation and timely payment under RCM, and non-compliance attracts penalties and interest.

Crypto Tax Evasion

Crypto tax evasion occurs when individuals or entities fail to report income, gains, or holdings from cryptocurrency transactions. This includes not disclosing capital gains from trading, mining income, or earnings from decentralized finance (DeFi) platforms. Many assume crypto is anonymous, but tax authorities are increasingly tracking wallet addresses and exchange data. Non-compliance can lead to hefty penalties, audits, and even criminal charges as global tax enforcement tightens.

Transfer Pricing Manipulation

This fraud involves multinational companies manipulating prices of transactions (goods, services, or intangibles) between their related entities in different countries to shift profits to low- or no-tax jurisdictions. By inflating or deflating transfer prices, companies reduce taxable income in high-tax countries, eroding the local tax base. Tax authorities combat this through rigorous transfer pricing regulations, documentation requirements, and comparability analyses to ensure arm’s length pricing.