When Separation Meets Taxation
It’s that time of year that most people and companies dread, but to be accused of tax evasion or other tax-related crimes can be quite overwhelming. Here are a few things you may want to know before assuming the worst.
What Is Tax Evasion?
First and foremost, what is tax evasion and how does it differ from tax avoidance? Tax avoidance utilizes legal methods to minimize tax deductions, while tax evasion is the illegal act of deliberately avoiding tax obligations through various illegal methods to conceal income or avoid paying taxes. Methods of tax evasion include claiming false deductions or credits, failing to report income or under-reporting taxable income, failing to file tax returns, and hiding taxable assets.
Tax evasion is serious and can carry steep penalties of up to five years in jail, a potential fine up to $250,000 and a felony charge. If found guilty, you run the risk of more frequent audits by the IRS. While audits typically involve the last three years of taxes, if an audit uncovers substantial under-reporting of income, the IRS may go back six years. In fact, an IRS audit can sometimes go back indefinitely—there is no limit to how far back an audit can go if the IRS suspects tax fraud.
Common Examples of Tax Evasion
Typical examples of tax evasion occur when people run a largely cash-based business and fail to report some of that cash as income. Sole proprietors may also underpay Social Security, payroll, and self-employment taxes. Underpayments are often hidden among individuals in business partnerships and small corporations. You may want to not that if your business partner is guilty, it doesn’t mean you are.
People with more sources of income are more likely to make a mistake on their tax returns. Common examples of under-reported income other than wages are dividends from a corporation, income from a rental property, capital gains from stocks or real estate, profits from cryptocurrency investments, and funds in offshore accounts.
Tax evasion occurs more obviously with income obtained from criminal activities, such as income generated from illegal gambling, drug dealing, and prostitution. But, you may also be under suspicion of tax evasion if you pay a contractor or childcare provider with cash.
Legal Defenses
One of the strongest and most common defenses for tax evasion or any other tax-related crime may be insufficient evidence. The prosecution must provide substantial evidence that under-reported income or inaccurately reported essential facts were done so deliberately. A competent attorney can contest this evidence a few different ways.
The first way to contest the evidence would be to scrutinize its veracity and admissibility. If the evidence was collected improperly, it may violate your fourth amendment rights and may not be admissible. Similarly, if the evidence includes faulty computations, its veracity is severely weakened and may be excluded.
The second way to contest the evidence is proving lack of intent. If it can be demonstrated that taxes were filed incorrectly due to simple mistakes, carelessness, misunderstanding, miscommunication, or reliance on inaccurate professional advice, any fraud charges may be dropped entirely.
Even if the case against you is compelling and based on strong evidence, a lawyer can make a case for lower penalties, draw up a payment schedule, and negotiate a settlement that spares you from facing criminal charges. This is why the best defense against tax-related charges is an experienced tax attorney with a deep understanding of tax laws, financial regulations, and constitutional protections.