Corporate Tax Fraud

Corporate Tax Fraud

Introduction

This assignment paper sets to critically discuss corporate tax fraud by reviewing and summarizing in a memorandum a minimum of five resources related to the selected topic. By using the standard memorandum format, this memo will critically identify the topic of discussion, provide an example of corporate tax fraud, the challenges faced, the substance of material reviewed, and recommendations on how to deal with the problem of corporate tax fraud.

Memorandum

To: All Staff

From: General Manager

Date: 3/3/2020

Ref: Corporate Tax Fraud

Corporate tax fraud entails the act of companies either public or private participating in illegal evasion of taxes by altering the financial reports to ensure that they do not reflect their actual financial positions through failing to report all income earned. Corporate tax fraud has become a significant problem in the corporate sector and seen a substantial number of companies face lawsuits for engaging in such economic crimes. An excellent example of corporate tax fraud is the underreporting income that a corporation has made within a given period to evade tax (Levi, 2010). The central impact that underreporting income as a type of corporate tax fraud has on the tax system is that it reduces the total amount of tax that is collected (Levi, 2010). That means the financial position of the company is not represented correctly. Such a company pays less tax than it should. Another impact that underreporting income has on the tax system is that it reduced the ability of this system to finance vital public services..

Challenges Faced

Several shortcomings are experienced as a result of the continued prevalence of corporate tax fraud in the business sector. For instance, companies that engage in corporate tax fraud tend to experience significant cash flow volatility and cash flow shortfalls after at least five years (Shevlin, Urcan & Vasvari, 2013). According to Shevlin, Urcan and Vasvari, (2013), instead of the bond investors viewing corporate tax fraud as an indicator of future information opacity that impairs monitoring efforts, they tend to consider it as a an early indicator of lower and more volatile future cash flows(Shevlin, Urcan & Vasvari, 2013). Moreover, managers who support corporate tax fraud have been found to regularly engage in tax evasion activities that are aimed at facilitating self-gains(Kim, Li & Zhang, 2011). For instance, they engage in activities such as complex tax shelters in various projects that they undertake, thus enabling them to abuse corporate funds for personal purposes and even make unauthorized compensation for their benefits. Such activities have seen most of the companies lose a lot of resources that could have been put into profitable use.

Analysis of the Quality/Substance of the Materials Reviewed

The resources used possess reliable and high-quality information that increases people’s understanding of the critical aspects of corporate tax fraud. One of the essential points that staff members of a company should understand regarding tax fraud, as argued by Shevlin, Urcan and Vasvari, (2013), in their journal article is that it is essential to examine three primary mechanisms (Shevlin, Urcan & Vasvari, 2013). They include information quality, future cash flow volatility, and future cash flow levels when addressing the problem of corporate tax fraud. That is because these three mechanisms help in establishing how the issues of tax avoidance by companies increase the cost of debt.Lanis and Richardson (2011) argue that corporations that are poorly governed have a higher capacity to become less tax aggressive when compared to well-governed companies that have a higher ability to become more tax aggressive(Lanis & Richardson, 2011). Moreover, Hasan et al. (2014) argue that companies experiencing corporate tax fraud that is facilitated by the top managers are always at the risk of losing customers and the trust of the investors from the negative publicity (Hasan et al., 2014). News concerning the company’s involvement in tax shelter results in adverse stock market reactions, and this may lead to companies facing significant financial challenges from the loss of both customers and investors.

Recommendations on Improving the Problem

Several strategies can be employed to help in improving or eradicating the problem of corporate tax fraud. For instance, companies need to understand that in the current business environment, the majority of the investors are inclined to assess the negative impact of corporate tax fraud in the long term while making an investment decision. Such knowledge may influence the companies to avoid corporate tax fraud as a strategy of encouraging more investors to invest in them. Moreover, comprehensive implementation of critical provisions of the Financial Accounting Standards Board (FASB) may help in lowering cases of tax evasion within a company. Further, increasing the level of punishment of the employees who are found guilty of professional misconduct through altering financial reports used to present the company’s financial position may help in eradicating the problem of corporate tax evasion.