From the Tax Law Offices of David W. Klasing -When do Tax Avoidance Strategies Become Criminal Tax Evasion?

IRVINE, Calif., April 11, 2023 /PRNewswire/ -- Many people work with CPA's and Tax Attorneys & EAs to aggressively minimize their tax obligations. This practice is referred to as tax avoidance. Meanwhile, those who deliberately underpay their taxes are considered to have committed tax evasion. Tax evasion can be met with criminal penalties, while utilizing tax avoidance strategies can be perfectly legal. However, in some cases, differentiating between evasion and avoidance can be a complicated endeavor.

For example, in the 1990s, former President Trump claimed $916 million in operating losses on his tax returns for his business. He did so despite his lawyers advising that this claim would not hold up in court. Did these actions constitute tax evasion, or were they simply an aggressive attempt at tax avoidance? There is a great deal of ambiguity associated with non-payment of taxes. In some cases, neither term seems to be an appropriate fit.

If you have questions pertaining to a tax issue, speak with our experienced Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295 or scheduling online here.

Tax Evasion vs. Tax Avoidance

The U.S. income tax system is based on the idea of voluntary compliance. It is the responsibility of taxpayers to report their income. Those who intentionally evade their tax obligations can be criminally prosecuted. However, avoiding taxes through certain credits, deductions, and income adjustments is perfectly legal.

Unfortunately, distinguishing between these two actions is not always easy, but our Dual Licensed Tax Attorneys and CPAs can help you determine the legality of your tax avoidance strategy, help you avoid criminal tax prosecution if you have crossed the line and help you use legal tactics to play tax offense to legally reduce your tax liability.

Examples of Tax Evasion

Tax evasion refers to the illegal non-payment or underpayment of taxes through fraud or deceit. Making innocent mistakes on your tax return will not automatically warrant a tax evasion charge. In order to be found guilty of tax evasion, the government must be able to prove that you willfully evaded your taxes. For instance, the following are all examples of actions that would constitute tax evasion:

Failing to Report Digital Assets

The Internal Revenue Service (IRS) requires taxpayers to report digital assets such as cryptocurrency. Unfortunately, some taxpayers will decline to report digital assets on their returns in hopes that they will not be uncovered by the IRS. However, those who purposely attempt to hide digital assets can be charged with tax evasion.

Failing to Report Overseas Income

Some people think that income generating assets & businesses held outside the U.S. will not be discovered by the IRS and thus the related taxable income and required information reporting gets intentionally omitted. However, the IRS does not care where you live. U.S. citizens and green card holders must file their tax returns and report all worldwide income no matter what country they live in. Failure to report overseas income coupled with omitted foreign information returns may be prosecuted as tax evasion.

Paying for Services Under the Table

Furthermore, paying someone who works for you in cash may constitute an act of tax evasion if it was done in order to avoid payroll tax obligations. Paying someone in cash is not inherently illegal. However, these payments must be communicated to the IRS on either a W2 or 1099. If you pay someone under the table and fail to report the wages, you may be charged with aiding and abetting the tax evasion of your workers.

Examples of Legal Tax Avoidance Strategies

Tax avoidance are legal tax strategies taxpayers can employ to lower their tax obligations. Countless businesses and individuals use tax avoidance to minimize the amount they owe to the IRS and various state taxing authorities. This practice is sometimes referred to as tax sheltering.

Taxpayers can legally avoid or minimize their tax obligations through several means. For instance, the following are all forms of tax avoidance:

• Investing in a retirement account and maximizing annual contributions
• Placing money into a Health Savings Account (HSA)
• Taking a mortgage tax reduction
• Claiming a child tax credit

Deductions and credits have to be approved by Congress and signed into law before becoming part of the U.S. tax code.

Are There Potential Defenses to Tax Evasion?

There are several defenses to tax evasion charges that you may be able to use to avoid criminal tax prosecution, civil fraud penalties & restitution:

Living Off of Cash Reserves

First, you may be able to defend against tax evasion charges by asserting that you were living off cash reserves instead of keeping your money in a bank. This defense may be utilized if the IRS utilized bank deposits and net worth methods attempt to prove that you committed tax fraud.

Truthful Mistake

You can also defend against tax evasion charges by arguing that you made a truthful mistake. Theoretically, criminal penalties for tax evasion can only be levied if the government can prove that you intentionally evaded your obligations.

Non-Taxable Source

Finally, you may also defend against charges of tax evasion by asserting that the funds at issue stem from a non-taxable source. For instance, you may have innocently acquired tax-free funds through gifts, loans, or inheritances. Call our law firm for help analyzing if this defense may be used in your case.

How Are Prison Sentences Determined for Tax Evasion?

Generally, tax evaders who cause greater amounts of tax loss will face lengthier prison sentences. Still, courts may analyze several other factors when determining penalties for tax crimes.

How Does the IRS Catch Tax Evaders?

There are multiple ways that the IRS can catch tax evaders. In many cases, taxpayers are caught through income and payroll tax audits. Agents who perform these audits will look for any understated income or deductions. Further, they may check to see if employers have been paying their workers in cash and failing to issue W2's or 1099's.

Still, many other badges of fraud can lead IRS agents to uncover tax evasion and other tax crimes. If an IRS agent suspects you of fraud, they will ask you a series of intent-based questions in an investigatory interview. You should avoid answering any of these questions in a way that indicates you intended to evade your tax obligations. Better yet, you should never allow yourself to be interviewed without qualified and experience tax defense counsel where you know you cheated on the returns under audit.

What Should You Do If You Have a History of Cheating on Your Returns in Order To Avoid Criminal Tax Prosecution?

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Note:  As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process.  Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

Call Our Law Firm for Help with Your Tax Issues

If you are seeking resolutions for your tax issues, get in touch with our experienced Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 or schedule a reduced rate consultation online here.

See our FBAR Compliance and Disclosure Q and A Library 

See our Foreign Audit Q and A Library

See our Employment Tax Law Q and A Library

See our Civil and Criminal Divorce Tax Law Q and A Library

See our International Tax Q and A Library

Here is a link to our YouTube channel: click here.

Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC