A small business owner who has failed to submit quarterly payroll taxes and is facing penalties for back taxes, needing a payroll tax attorney on his side.

Tax evasion is the practice or attempt to deliberately avoid paying a rightful tax liability. It is a federal crime in the United States, and cases of tax evasion are pursued seriously with severe punishments including jail time

The IRS works to actively identify instances where tax evasion may be occurring. Individuals and businesses alike often work with tax professionals to ensure their tax returns are compliant and not fraudulent. However, fraud is not the same as a mistake, and taxpayers should be aware that using legal methods to reduce their tax liabilities is also not the same as fraud. 

To help you out, this post explains tax evasion, what to do if you’re worried about tax evasion charges, and how to find a tax fraud attorney to help you. 

What Is Tax Evasion?

Tax evasion is the act of intentionally choosing not to pay taxes owed to the government. This can be done by knowingly underreporting income, inflating tax deductions, hiding money in offshore bank accounts, or engaging in other deceptive practices to reduce your total tax liability. 

Tax evasion is any deliberate and willful attempt to evade the payment of taxes that are legally owed. It’s considered a criminal offense and is subject to penalties, fines, and potentially imprisonment. 

Tax Evasion Vs. Tax Avoidance

Tax evasion is often confused with tax avoidance, but there is an important distinction between them. Tax avoidance involves using legal means to minimize one’s tax liability. Practices such as utilizing tax credits, income splitting, and including charitable contributions on your tax return are all examples of legal tax avoidance.

Example of Tax Evasion

One recent example of a tax evasion case can be found on the IRS website, which details a Kansas man who submitted several false tax returns through 2016 – 2018. The man was sentenced to one-year imprisonment for grossly misreporting the value of mortgage payments, real estate, and income taxes for multiple years.

Another example of tax evasion are fraudulent ERC claims. Many business owners claimed credits they weren’t entitled to, often because they were tricked into doing so by an ERC mill. Unfortunately, however, you are responsible for the details on your tax return, even if someone else prepared it. 

Evasion of Tax Assessment

An evasion of tax assessment involves taking deceptive actions to understate the total taxable income, or to misrepresent financial information, thereby reducing the tax liability. Evasion of tax assessment can be attempted through several different methods, including:

  • Underreporting Income – failure to report the full amount of income earned, whether from employment, business activities, investments, or other sources.
  • Inflating Deductions – exaggerating or falsely claiming tax deductions, expenses, or credits to reduce the taxable income.
  • Concealing Assets – hiding assets or income in offshore accounts, shell companies, or other complex financial structures to avoid detection by tax authorities.
  • Engaging in Fraudulent Schemes – participating in schemes or transactions specifically designed to deceive tax authorities and manipulate the assessment process.
  • Falsifying Documents – creating or altering documents, such as invoices, receipts, or financial statements, with the intent to mislead tax authorities during the assessment process.

Taking steps to evade correct and lawful tax assessment is illegal, and can result in serious consequences including fines, penalties, and criminal charges. On top of that, one could also have their assets seized, and professionals or business owners may have professional licenses revoked if found guilty of significant criminal charges for any form of tax evasion. Whether you’re a private individual or a business owner, a criminal conviction for tax evasion will cause lasting reputational damage for years to come.

Evasion of Tax Payment

As well as evasion of tax assessment, tax evasion can also be practiced by trying to avoid paying taxes. Evasion of tax payment can often include one or more of the following practices:

  • Concealing Income – hiding income or assets to lower the reported taxable income and taxes owed.
  • Offshore Tax Evasion – keeping funds in offshore accounts or using other international financial structures to hide income.
  • Pyramid Schemes – artificially inflating a business’s expenses, engaging in fraudulent transactions, or creating complex schemes to reduce taxable profits.
  • Non-disclosure of Income – failing to report income from various sources, such as cash transactions or under-the-table payments.
  • Engaging in Illegal Tax Shelters – using illegal or abusive tax shelters to reduce taxable income.
  • Identity Theft and Fraud – using false identities or engaging in fraudulent activities to avoid detection and the payment of taxes.

Taxpayers may also try to evade paying taxes by submitting fraudulent offers in compromise applications. An OIC is when the IRS lets you settle your taxes for less than you owe, but if you lie on the application (for example, by understating your assets), you are committing tax evasion.

How Tax Evasion is Detected

The Internal Revenue Service is very active in its attempts to both detect and prosecute cases of tax evasion. Here’s a look at some of the methods that are used to identify suspected instances of tax evasion:

IRS Audits & Data Matching

Primarily, the IRS uses audits to review and verify the accuracy of tax returns for businesses and individual taxpayers. Audits are either issued randomly based on specific risk factors, or as a result of discrepancies identified during data matching. 

Data matching is simply when the IRS compares information reported on tax returns with data from other sources, such as W-2s, 1099s, and other financial institutions. The IRS also uses sophisticated software to look for anomalies in tax returns.

Information from Third Parties & Whistleblower Programs

The IRS receives a constant stream of information from various third-party sources, including banks, employers, and financial other institutions. This information is added to IRS databases, and analyzed for discrepancies between the information reported by these institutions, and what is reported on tax returns.

The IRS also has whistleblower programs that encourage individuals with information about tax evasion to come forward. Whistleblowers may receive rewards if the information leads to the collection of unpaid taxes.

Social Media and Public Information Online 

It might seem far-fetched, but the IRS will absolutely monitor social media and other publicly available online activity to detect tax evasion. The reality is, many people who are engaged in suspicious financial practices, intentionally or not, often do little to hide it online.

In addition to the IRS’s attempts at detecting tax evasion, there are several systems in place internationally to assist in the detection of tax evasion across nations. These include the Common Reporting Standard (CRS), Automatic Exchange of Information (AEOI), and FATCA, or the Foreign Account Tax Compliance Act, which extends the ability of the US government to detect offshore tax evasion.

Legal Defense and Remediation

Tax lawyers and legal advisors play a crucial role in helping taxpayers to correctly pay their taxes, and avoid any errors which could result in suspicions of tax evasion. Both private individual taxpayers and businesses dealing with tax-related issues will often seek professional help from tax experts. Compliance, due diligence, and legal representation during audits or even serious allegations are all areas where tax lawyers commonly provide assistance.

Voluntary Disclosure

One option that tax lawyers can guide their clients through is voluntary disclosure. This is the process by which individuals or businesses proactively come forward to disclose previously undisclosed income, assets, or other tax-related information to the IRS. If executed in time, this can ensure you meet your tax obligations and potentially mitigate any penalties that might otherwise be imposed.

In addition to reduced penalties, voluntary disclosure can of course also help avoid a criminal prosecution and conviction. It can bring closure around what will obviously be a hugely stressful period, and this program also helps to avoid any damage that might be caused by a charge of tax evasion on our reputation.

It’s important to consult with your tax professional or legal advisor in order to correctly navigate the voluntary disclosure process effectively, and ensure compliance with applicable laws and regulations.

Tax Evasion vs. Tax Fraud

Tax evasion and tax fraud are terms often used interchangeably, but they have distinct legal meanings and nuances. While both involve wrongful actions related to taxes, the key differences lie in the intent and the specific elements of the offenses. Here are the nuances and legal distinctions between tax evasion and tax fraud:

Tax Evasion

Tax evasion is the intentional act of evading the assessment or payment of taxes by illegal means. It involves a clear and deliberate effort to deceive tax authorities through methods like failing to declare income, inflating tax deductions, or using fraudulent means to reduce the amount of taxable income.

Tax evasion is a federal criminal offense, and convictions commonly result in fines, penalties, and periods of imprisonment. Underreporting your income, hiding assets in offshore accounts, and using false tax or financial documents are all examples of common tax evasion practices.

Tax Fraud

Tax fraud, on the other hand, refers to quite a broader range of deceptive practices related to taxation, including both tax evasion and other fraudulent activities. Just like tax evasion, tax fraud involves willful intent to deceive tax authorities. However, it can also include other fraudulent activities related to taxes, such as providing false information, false statements, or engaging in other deceptive practices.

While tax evasion is always a criminal offense, tax fraud generally can fall under either criminal or civil offense. Depending on the nature of the deception and practices accused, tax fraud can result in either a criminal or civil charge.

Submitting false information on a tax return, making false statements to tax authorities, or using fake Social Security numbers are all common examples of tax fraud.

Get Help with Serious Tax Debt

Tax evasion, which falls under the broad category of tax fraud, is a deliberate attempt to evade the assessment or payment of taxes through illegal means. The IRS employs various methods to detect suspected instances of tax evasion, and legal defense provided by tax lawyers is crucial for individuals and businesses facing tax-related issues. 

If you’re facing serious tax-related issues, you can seek help with confidence, and without judgment, from the tax attorneys at Seattle Legal Services. To get help now, contact us today.