I buy and sell a lot of cars, trucks and equipment. I often hear people talking about CarFax reports, especially as a guide to buying a "new" used car. Generally most everyone I talk to believes that if a car has a clean CarFax, it is a good car. This is not always the case. CarFax reports are a tool to be used to judge the story the seller is telling, they are not the answer to the story. CarFax uses information gleaned from state Divisions of Motor Vehicles, insurance industry databases, dealership service records, etc. to generate a history of a car's life. The information is only as good as what is reported.
Let's consider the millions of vehicles that are owned by private individuals or especially corporations/fleets who are self-insured or only carry liability insurance. If that vehicle is sent to the junkyard by its owner (And not paid off, or "Total lossed" by an insurance carrier)it will still have a "clear" title. Many auto salvage yards also carry state-issued used motor vehicle dealers' licenses, which allows them to resell the car with a clean title like any other dealer could do. I have seen many cars which would have been "Totalled" by insurance which were sold privately and rebuilt with clean titles, and therefore a clean CarFax. It is also possible that a car may be sold privately to a reseller who does not transfer the title into their name. This is called "Jumping" titles and is actually a form of tax fraud. It also does not leave a trace for CarFax to pick up in the databases, and it may look like a car hasn't had as many owners as it really has. Also, an unscrupulous dealer may take a car in as trade or purchase that has high miles.
They are supposed to report the accurate mileage when the title is transferred to the dealership. However, they have some time before they are required to do this, and some dealerships will tamper with the odometer, or replace the entire odometer with one from a low-mileage wrecked identical car, and then register that new, lower mileage on the title at the state motor vehicles title division.
...read the full guide with pics here