Steps to Take if You’re Under Investigation for Tax Evasion
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Steps to Take if You’re Under Investigation for Tax Evasion
Getting that letter from the IRS saying you’re under investigation for tax evasion can be terrifying. Your palms get sweaty, your heart starts racing – it feels like your world is crashing down. But don’t panic! There are steps you can take to protect yourself.
First things first: stop any ongoing tax evasion. I know, easier said than done, but continuing to break the law will only make things worse for you in the long run. Consult with a tax attorney about coming clean and getting compliant. The attorney-client privilege means your conversations will be confidential.
Next, gather up any evidence related to your taxes – returns, receipts, bank statements, etc. Your lawyer will need these to start piecing together your case. Be sure to gather evidence of any good faith efforts you made to comply with complex tax laws. We all make mistakes, and demonstrating you tried to do the right thing can help.
Now it’s time to find an experienced tax attorney. Look for someone who specializes in tax fraud cases and has represented clients under criminal investigation. This is not the time for your buddy who handles wills and trusts! Interview several attorneys before deciding – this is a very personal relationship.
Once you’ve hired your lawyer, do not try to handle the IRS investigation yourself. Invoke your right to have your attorney present for any IRS interviews. Be polite to the IRS agents, but do not answer any substantive questions without your lawyer present. The stakes are high here, so keep quiet!
Your lawyer will want to proactively engage with the IRS rather than just wait for their next move. They may submit a “white paper” detailing your good faith efforts at compliance. Or they may initiate settlement talks if it seems criminal prosecution can be avoided. Your experienced attorney will know how to strategically engage.
If criminal charges do ensue, keep relying on your lawyer. They will represent you before the grand jury and at trial. Be honest and forthcoming with them so they can mount the best defense. For example, be upfront about that offshore account you didn’t report. Your lawyer needs to know everything to defend you.
A few final tips:
- Be patient – these investigations take time, often years.
- Stay calm and avoid rash decisions – your lawyer is your guide.
- Don’t try to fool the IRS again – come clean.
- Keep up with your taxes while under investigation – no need to make things worse!
- Take care of yourself – eat right, exercise, talk to friends. This is stressful!
Dealing with a tax evasion investigation is scary. But by relying on an experienced tax attorney, stopping any ongoing evasion, and being honest, you can get through this. With time and effort, you can put it behind you.
Common Tax Evasion Schemes the IRS Cracks Down On
The IRS doesn’t take tax evasion lightly. They aggressively investigate common schemes used to illegally avoid paying taxes. Some top schemes on the IRS radar right now include:
- Hiding income offshore – The IRS is intensely focused on unreported foreign accounts and assets.
- Paying employees “under the table” – Paying employees in cash without withholding taxes is a red flag.
- Claiming personal expenses as business deductions – Your Netflix bill is not a business expense.
- Hiding cash transactions – Keeping income “off the books” is illegal.
- Inflating deductions and expenses – You can’t deduct your dog as a security expense.
These schemes, and others like them, will land you in the IRS hot seat if discovered. An experienced tax attorney can advise you on discontinuing illegal practices and dealing with any investigation.
Your Legal Rights if Under Investigation
If you find yourself under the microscope for tax evasion, it’s important to know your legal rights. Here are some key rights to keep in mind:
- You have the right to remain silent – you don’t have to answer questions from the IRS.
- You can hire a tax attorney – the IRS must cease contact with you if you have counsel.
- Your attorney can be present for IRS interviews – never go it alone.
- You’re entitled to see the evidence against you.
- You have the right to a speedy trial if formally charged.
- The IRS must follow procedure – if they don’t, evidence may be suppressed.
- You maintain the presumption of innocence unless proven guilty.
Knowing your rights provides crucial protection. Don’t let the IRS bully or intimidate you – stand up for yourself with your lawyer beside you.
Avoiding Criminal Tax Charges
Once you’re under that microscope, avoiding criminal prosecution becomes priority number one. Here are some tips that may help you steer clear of formal charges:
- Come clean – admit your wrongdoing and commit to fixing it.
- Consider a voluntary disclosure – disclosing before the IRS catches you can help.
- Cooperate fully – work openly with the IRS, on your lawyer’s advice.
- Make good faith efforts to pay back taxes.
- Highlight compliance – note efforts you made to comply.
- Emphasize you acted without intent – mistakes happen.
While not guaranteed, these actions demonstrate good faith and may persuade the IRS to forgo criminal prosecution. Much depends on the nature and extent of the evasion, so lawyer guidance is key.
The Cost of Criminal Tax Convictions
If efforts to avoid criminal prosecution fail, the consequences can be severe. Potential penalties for a tax evasion conviction include:
- Up to 5 years in prison and $250,000 in fines for each count.
- Court costs and legal fees running into tens of thousands of dollars.
- Restitution for back taxes owed, plus interest and penalties.
- Asset forfeiture – losing property connected with tax evasion.
- Loss of rights like voting, gun ownership, and certain professional licenses.
- Reputational damage – tax fraud convictions make headlines.
These consequences can destroy finances, freedom, and reputation in one fell swoop. Some are even life-long. This is why avoiding criminal prosecution is so critical.
Settling With the IRS
If criminal prosecution seems likely, settling with the IRS may be an option. In a settlement agreement, you avoid criminal charges by agreeing to certain terms, which may include:
- Paying back taxes, interest, and civil penalties.
- Agreeing not to deduct settlement payments.
- Extending statutes of limitations on tax assessments.
- Consenting to tax liens on property.
- Allowing continued investigation on related matters.
Settlement terms vary case-by-case. Your lawyer will negotiate for the best possible deal. You’ll likely pay steep fines, but settlement keeps you out of prison. In some cases, it may be the best realistic option.
The Bottom Line
Being investigated for tax evasion is serious business with potentially life-changing stakes. But there are steps you can take to minimize damage:
- Retain an experienced tax attorney right away.
- Exercise your legal rights.
- Stop any ongoing evasion immediately.
- Cooperate fully with the IRS under your lawyer’s guidance.
- Explore settlement options if criminal charges seem likely.
While a tax evasion case feels crushing, good legal counsel and smart choices can help you survive it. Don’t go it alone – get help to make the best of a bad situation.
[1] How Do You Report Suspected Tax Fraud Activity? | Internal Revenue Service
[2] Article: 6 Steps to Take after Discovering Fraud | CFTC
[3] Fraud is suspected: Now what? – Journal of Accountancy
[4] Tax Fraud Investigation in Fairfax by Haynes Tax Law, Part 1