Tax Evasion: Everything You Need To Know

Tax evasion is a crime. And if you are found guilty of felony tax evasion, you can get heavy fines and even time behind bars. Unfortunately, when it comes to the law, ignorance is not bliss. 

You need to understand what tax evasion is to avoid it, and if you have, to get legal help. 

This article will take you through what you need to know. 

What Constitutes Tax Evasion?

Tax evasion is an illegal, willful attempt by an entity or individual to avoid accurate assessment or to pay their true tax liability. 

This can be done by sending in erroneous tax returns that misrepresent how much you owe. For example, if you run an enterprise that rakes in $ 400,000 but you file for $ 300,000. This difference lowers the taxable revenue, meaning you pay significantly less in taxes than you should.

This is a federal offense under the Internal Revenue Service (IRS) tax code. 

However, for an individual to be prosecuted for tax evasion, it must be proven that;

• There is an unpaid tax debt 
• The defendant evaded or attempted to escape paying their taxes
• The defendant specifically intended to avoid paying taxes

In short, tax evasion is proven by the fact the person in charge intended to avoid paying taxes. For an event to qualify as tax evasion, it must be voluntary, conscious, and intentional. 

Honest mistakes and errors don’t qualify as tax evasion. However, it’s advisable to talk to a tax attorney if you notice you have made some mistakes with your taxes. They can review the matter and advice accordingly. 

Forms of Tax Evasion   

The term tax evasion is a generic term that doesn’t tell us much about the specifics of the crime. 

One of the primary things to understand is that it refers to either evading tax assessment or evading making the rightful payments. 

This tells us there has to be a taxpayer. This can be an individual or an entity. The taxpayers must then hide assets from the IRS to avoid paying their tax liability. 

Here are tax evasion scenarios to help you understand the concept better. 

• Misrepresenting income, basically by reporting lower figures to pay lower taxes
• Over-reporting tax deductions to get higher refunds
• Adding fictitious dependents on your return
• Destroying tax records
• Claiming illegal credits
• Concealing assets or income to reduce your tax bill
• Transferring some of your assets to third parties to avoid paying taxes
• Holding property in a third party’s name
• Filing falsified tax returns
• Having two sets of books for your records
• Destroying tax records
• Hiding sources of income

What About Evading Tax Assessment?

We have seen that tax evasion can include avoiding tax assessment or avoiding making the actual payments. 

So how does evading tax assessment come about?

The most common method taxpayers use to avoid assessment is entering wrong figures about their taxable income on their tax returns. 

Let’s look at an example. 

Mr. X buys property at $ 3 million and makes capital upgrades worth $1 million. Later, they find a buyer for the property offering $ 6 million. Consequently, Mr. X makes $2 million in capital gains. This amount should be reported to the IRS when Mr. X files his returns. 

However, instead of a purchase price of $3 Million, Mr. X inflates the basis. Therefore instead of reporting the basis and capital improvements as $ 4 million, he reports the same as $5 million. 

Therefore, the income tax returns show $1 million in capital gains, meaning MR. X has concealed $1 million that will not be taxed. Because the taxes on $2 million are higher than those for $1 million, MR. X will have reduced his tax bill. 

The tax liability on the tax return forms is known as an assessment. By going about it this way, Mr. X has evaded his tax assessment, which is a crime.  

Let’s bring this closer to home. 

Assuming Miss Jones is in the market for a vehicle but can only buy a second-hand car. She finds one for $10 000 shillings. However, Miss Jones and the seller agree to write the purchase price as $ 5,000 in the car sale agreement. 

They must pay local and state sales tax when registering the vehicle. Legally, this should be computed based on the actual sale price of $10,000. However, they pay taxes based on the falsified sale price of $ 5,000. This is another case of evasion of tax assessment. 

Evading tax assessment is all about falsifying documents and figures so that you are taxed on a lower amount. 

How, then, do people evade tax payments?

How Do Taxpayers Evade Tax Payments?

This is typically done by lying about income and assets to convince the IRS that one can’t afford to settle their tax obligation. 

Let’s take a step back. 

Say Jane has not been paying her taxes, and the IRS has caught up with her (as it always does). As a result, she owes $120,000 in back taxes. Jane and the IRS resolve the matter by applying for an offer to reduce this bill. 

To facilitate the process, Jane is required to detail all assets and income to the IRS. Jane works as a nurse but makes some online jewelry sales as a side hustle. So Jane describes her employment income but leaves out income from a side job and transfers her assets to a friend. The IRS is none the wiser about the transferred assets. 

The IRS keeps its end of the bargain and uses the provided information, though inaccurate, to reduce Jane’s tax bill. In effect, Jane has evaded taxes. 

In other scenarios, people evade taxes by simply not paying them, with or without filing returns. One way this is accomplished is by going off the grid and off the IRS’s radar. 

Is Failure to File Criminal?

Failure to file can be considered criminal, although this is uncommon. Typically, taxpayers that fail to file their returns get penalties and interests accruing on the unpaid liability. 

If you have unfiled returns, you can get back on track without too much concern about tax evasion and or other criminal charges being brought against you. 

Still, it helps a lot for you to reach out to the IRS before they come to you. A key benefit of contacting the IRS is that it can give you the leeway to make a voluntary disclosure.

Additional benefits of this are that it helps reduce your failure to pay and other penalties and fees, and the IRS restricts itself to scrutinizing your non-payment for a limited number of years. 

Is Keeping Two Sets Of Books Criminal?

It’s hard to find a good reason why a business is keeping two sets of books, Often, this is done by businesses looking to file falsified tax returns. 

This way, they have the original records that bear the company’s true financial position and the other record with misrepresented figures for the IRS. 

The latter is what is used to file returns. This one can have some revenues omitted, bloated expenses, and other misrepresentations to lower the business’ tax liability. 

What Is The Punishment For Tax Evasion?

Tax evasion is illegal and carries felony charges. The penalties can be up to $250,000 ($100,000 for offenses committed before 1985) and $500,000 for individuals and corporates, respectively. There is also the chance for jail time of up to five years. Either way, defendants also find themselves with substantial legal fees. 

Still, the penalties differ, and what is illegal and what is not can be a grey area sometimes. 

For example, a bartender that doesn’t include their tips in their returns commits an illegality. So does a home bases business whose proprietor includes domestic utilities in their business expenses. The same applies to small companies that write off vacations as business trips. 

However, the IRS is unlikely to go after these, instead focusing on netting the big fish and corporations that swindle the government off millions or billions annually. 

Having said that, you still would want to avoid being caught in the IRS’s crosshairs, so err on the side of caution. If you are unsure what constitutes tax evasion or think you might have crossed a line, talk to a tax attorney immediately. 

They can review the facts with you, determine what is criminal and what is not, and advise you on how to get back on the IRS’s good books. 

Unless you willingly took actions to deceive the IRS and defraud the government, you’re unlikely to go to prison. 

For this to happen, there has to be willful intent. 

If the IRS were to prove willful intent, you would face several consequences aside from penalties and jail time. These include;

• Interest on unpaid tax debt
• Withdrawal of your passport
• Liens
• Loss of social security benefits
• Loss of personal assets like houses, cars, boats
• Damage to your credit rating

How Does The IRS Find Tax Evaders?

Does the IRS catch all instances of tax evasion or tax assessment evasion? Probably not. This is, however, not a chance you want to take with your personal or business taxes. 

The IRS randomly selects several accounts for auditing each year. These accounts are passed through a number of processes to detect mathematical errors and odd income and expense reporting. If anything suspicious shows up, the auditors flag the accounts in question for review. 

If the manager concurs with the auditor, then the account is escalated through the system until it reaches the individuals responsible for prosecution. 

Besides these random checks, the IRS also used computerized systems to review tax returns for oddities. Any discrepancies are flagged for a manual review.

For example, a business account can reflect funds that don’t agree with the reported income. In such an event, the IRS will scrutinize your accounts further to trace the root of the anomaly. 

There is also the whistleblower program where individuals can offer information on tax evasion activities against individuals and businesses. Within this is the possibility of the whistleblower getting a percentage of the unpaid taxes if their tip-off helps the IRS catch up and successfully prosecute the said tax cheat.  

To be a whistleblower, you need to fill in form 3949-A-Information Referral. The IRS will always keep your identity confidential. 

Tax Evasion vs. Tax Avoidance

Tax evasion is criminal as it uses illegal methods to avoid paying taxes. These illegal means include filing inaccurate returns, overstating business expenses, and failing to collect or pay withholding tax.

On the other hand, tax avoidance uses legal means to lower a taxpayer’s obligation. These include giving to charitable organizations and investing income into tax-deferred mechanisms like an Individual retirement account (IRA).

Many corporations hire tax accountants to oversee tax planning. This includes tax avoidance, which is perfectly legal and saves businesses a lot of money by minimizing their tax obligations. 

Because the line between the two can get blurry, it helps to consult a tax attorney occasionally with any questions and concerns you might have. Should you be on the wrong side of the divide, they would know exactly how to get you back on track. 

Worried About Your Taxes?

Nobody wants to find themselves on IRS’s radar, but mistakes happen. When they do, you need to talk to someone with the grit and expertise to resolve tax matters successfully. That’s precisely what we do at Cumberland Law Group. Contact us for a free consultation today.