Warning Signs the IRS Considers Your Tax Evasion Criminal
Contents
- 1 Warning Signs the IRS Considers Your Tax Evasion Criminal
- 1.1 Failing to File Returns or Pay Taxes
- 1.2 Filing False Returns
- 1.3 Having Large Unexplained Increases in Net Worth
- 1.4 Using Cash Extensively
- 1.5 Having Offshore Accounts or Entities
- 1.6 Inconsistencies Between Tax and Business Records
- 1.7 Not Withholding Taxes from Employees
- 1.8 Structuring Bank Transactions
- 1.9 Using Shell Companies or Trusts
- 1.10 Deducting Personal Expenses as Business Expenses
- 1.11 Evidence of Tax Protester Beliefs
- 1.12 Not Reporting or Paying Employment Taxes
- 1.13 Claiming the “Fifth Amendment” to Avoid Answering Tax Questions
- 1.14 Not Reporting Income from Illegal Activities
- 1.15 Keeping Two Sets of Books
- 1.16 Skimming Business Revenue
- 1.17 Claiming Personal Credits/Exemptions You Don’t Qualify For
- 1.18 Using a Fake Social Security Number
- 1.19 Submitting a Frivolous Tax Return
- 1.20 Not Reporting Foreign Income or Assets
- 1.21 Destroying or Hiding Records
- 1.22 Not Reporting Barter Transactions
- 1.23 Doing Business in Cash Only
- 1.24 Using Multiple Identification Numbers
- 1.25 Frequently Changing Business Names or Entities
- 1.26 What to Do if You’re Under Tax Evasion Investigation
- 1.27 References
Warning Signs the IRS Considers Your Tax Evasion Criminal
Paying taxes is never fun, but evading taxes can lead to serious criminal charges. The IRS doesn’t take tax evasion lightly. There are certain red flags that may cause the IRS to open a criminal investigation into your taxes. Here’s what you need to know.
Failing to File Returns or Pay Taxes
One of the biggest warning signs is failing to file tax returns or pay taxes owed. According to the IRS, willful failure to file returns, supply information, or pay taxes actually due are all considered tax evasion crimes. The key word here is “willful.” If you made an honest mistake or had reasonable cause for not filing/paying, it may not be criminal. But intentionally failing to file or pay taxes you owe is a red flag.
Filing False Returns
Another major red flag is filing a tax return that you know contains false information. Common examples including underreporting income, inflating deductions/credits, hiding accounts/assets, and lying about your residency status. Lying on your tax return is tax evasion, plain and simple. The IRS treats false returns very seriously.
Having Large Unexplained Increases in Net Worth
If the IRS notices large, unexplained increases in your net worth, they may suspect tax evasion. Let’s say you report $50,000 of income per year, but suddenly buy millions of dollars worth of assets. That’s a red flag, because your spending seems to exceed your income. The IRS may investigate whether you have unreported income sources.
Using Cash Extensively
Be careful using large amounts of cash for purchases or expenses. The IRS monitors cash transactions, since cash income can be easier to hide. Things like making big cash down payments, paying contractors under the table in cash, or depositing cash in amounts under $10,000 to avoid reporting requirements can draw suspicion.
Having Offshore Accounts or Entities
Having money in offshore accounts or entities located in tax havens is another red flag. The IRS closely monitors offshore activity, since it’s an easy way to hide or underreport income. Make sure you comply with all reporting requirements for foreign accounts and assets. Otherwise the IRS may think you’re using them to dodge taxes.
Inconsistencies Between Tax and Business Records
The IRS compares tax returns against other financial records to look for discrepancies. If your tax records don’t match business records from your bank, PayPal, etc., it raises questions. Common flags include underreporting business income or overstating business expenses on your taxes.
Not Withholding Taxes from Employees
If you’re an employer, be sure to withhold income, Social Security, and Medicare taxes from employee paychecks. The IRS monitors this, and not paying withholding taxes can trigger an audit. Failing to withhold taxes suggests you may be pocketing the money instead of paying it to the IRS.
Structuring Bank Transactions
“Structuring” means deliberately conducting financial transactions in a way that avoids reporting requirements. For example, intentionally making multiple sub-$10,000 cash deposits instead of a single large deposit. Structuring often signals an effort to evade taxes by hiding income.
Using Shell Companies or Trusts
The IRS pays attention to entities like shell companies, trusts, or LLCs that seem to lack real business purpose and economic substance. These types of entities are commonly used to conceal assets/income and reduce tax liability in shady ways.
Deducting Personal Expenses as Business Expenses
One popular tax evasion technique is deducting personal expenses as business expenses. But be warned – the IRS looks closely at expense deductions for red flags. Improperly writing off vacations, vehicles, hobbies, etc. as business expenses is illegal tax evasion.
Evidence of Tax Protester Beliefs
Some people hold “tax protester” beliefs asserting taxes are illegal or voluntary. Tax protesters often file zero returns, submit frivolous documents, or use other sham tactics to avoid taxes. The IRS deals harshly with tax protesters, regarding their activities as willful tax evasion.
Not Reporting or Paying Employment Taxes
As an employer, you must collect and pay Medicare, Social Security, and income taxes on employee wages to the IRS. Intentionally failing to report or pay employment taxes is considered tax evasion. The IRS may impose steep penalties.
Claiming the “Fifth Amendment” to Avoid Answering Tax Questions
You have the right not to incriminate yourself under the Fifth Amendment. But frivolously claiming this right when the IRS asks tax questions can draw scrutiny. Only refuse to answer questions that may genuinely incriminate you in criminal tax evasion.
Not Reporting Income from Illegal Activities
Income earned from illegal activities like drug dealing or gambling is still taxable and must be reported. The IRS may investigate taxpayers with lavish lifestyles but no obvious income source. Not reporting illegal income is tax evasion.
Keeping Two Sets of Books
Maintaining double bookkeeping to hide income or overstate expenses is a classic tax evasion scheme. Any business that keeps two sets of books – one accurate and one false for taxes – is committing fraud. The IRS sees this as a huge red flag.
Skimming Business Revenue
“Skimming” involves secretly pocketing a portion of a business’s receipts. Skimmed cash often doesn’t get recorded in the books or reported on tax returns. The IRS monitors revenue patterns for sudden unexplained drops that could signal skimming.
Claiming Personal Credits/Exemptions You Don’t Qualify For
Only claim tax credits and exemptions you’re entitled to based on your circumstances. For example, improperly claiming the Earned Income Tax Credit as an ineligible taxpayer could draw scrutiny and penalties from the IRS.
Using a fake or stolen Social Security number to file a tax return or obtain employment is considered tax fraud. This includes Social Security numbers belonging to deceased persons. The IRS investigates misuse of Social Security numbers.
Submitting a Frivolous Tax Return
Frivolous tax returns containing nonsense claims or bizarre deductions are illegal. These returns are often based on tax protester arguments. The IRS assesses penalties for filing frivolous returns or submitting other frivolous tax documents.
Not Reporting Foreign Income or Assets
If you have foreign accounts, assets, or income, you must report them to the IRS. Failure to disclose offshore activity can lead to civil and criminal tax penalties. The IRS has ways to detect unreported foreign holdings.
Destroying or Hiding Records
If the IRS suspects you destroyed or concealed records to hide taxable income, it can be construed as an attempt to evade taxes. Never destroy books or records prior to the legal time limits for retaining documents.
Not Reporting Barter Transactions
Bartering provides a way to conceal income from the IRS. But the fair market value of goods/services received through bartering is taxable and must be reported. Failing to do so is considered tax evasion.
Doing Business in Cash Only
While not illegal per se, doing business exclusively in cash raises suspicions. The IRS may probe why a business avoids banking and non-cash payment methods, which facilitate tax reporting and documentation.
Using Multiple Identification Numbers
The IRS flags people who obtain multiple Employer Identification Numbers or Social Security numbers. This could signal an attempt to hide assets, set up shell companies, or otherwise evade taxes.
Frequently Changing Business Names or Entities
The IRS pays attention to businesses that change names/entities frequently without clear business justification. Rapid churn of new business names or entities can be a tax evasion tactic.
What to Do if You’re Under Tax Evasion Investigation
If you’re under IRS criminal investigation for tax evasion, take it very seriously. Hire a tax attorney immediately – it’s critical to have skilled legal representation protecting your rights. Be cooperative with the IRS, but don’t answer questions without your lawyer present. Penalties for tax evasion can include massive fines and years in prison.
The tax laws are complex, but ignorance or mistakes normally don’t rise to the level of willful criminal tax evasion. However, intentionally deceiving the IRS or using shady schemes to dodge taxes can result in prosecution. If you’re ever unsure about the legality of a tax strategy, consult with a trusted CPA or tax attorney.
Paying taxes is difficult for many Americans. But engaging in intentional tax evasion and fraud is never the answer, and can land you in serious legal jeopardy. Report all income accurately, claim only legitimate deductions, and file honest, timely returns to stay on the right side of the law.
References
IRS Criminal Investigation – How Investigations Get Initiated