Any business owner knows that bringing in money is only half the battle. In order to make a profit (and a living), income must stay above expenses. And nearly every business has expenses. Fortunately our tax code recognizes this. No business pays taxes on all of the money they take in. Income is defined by the tax code as the income that exceeds expenses. If a business is paying more expenses than it’s bringing in, it isn’t making a profit, and has no income for the IRS to tax. The reasoning behind this is obvious. It would simply be unfair, not to mention bad for the economy, to tax a business that wasn’t actually making an income.
So every business will attempt to deduct as many expenses from income as possible. More expenses deducted means less income to report and less income tax to pay. Consequently, a common scheme to avoid paying income taxes is to deduct false business expenses to reduce the amount of taxable income. While this may reduce your taxes, it is more likely to raise the ire of the IRS and land you in jail.
An auditor won’t take long to figure out whether or not expenses that were deducted were actually paid. Likewise, inflating business expenses is unlikely to take that long for the IRS to detect. Deducting fake business expenses may be an easy way to eliminate taxable income, but it’s also an easy way to get prosecuted for tax fraud. The tax code is very specific about what expenses are deductible and which are not. Deducting expenses that are not approved, is a good way to invite a criminal investigation.