Tax evasion, one of the most commonly committed federal crimes, carries significant financial penalties, and in some cases, jail time.
A type of tax fraud, tax evasion can involve civil or criminal penalties — or both. If the IRS believes that you have committed fraud on your tax return, they can assess a civil fraud penalty equal to 75% of the under-reported taxes. If the fraud is believed to be serious enough, they can refer your case to their Criminal Investigation Unit, which could lead to criminal charges.
What Is Tax Evasion?
This federal crime is typically characterized by some form of intentional misrepresentation to the IRS or the Utah State Tax Commission.
The most common types of tax evasion are the underreporting of income and the overstatement of expenses. Hiding money and maintaining two sets of books are also common ways of dodging IRS obligations.
Although accidental errors still carry penalties, they aren’t regarded or treated as harshly. The challenge is proving you had no intent to defraud the IRS or state in making those errors.
How Does the IRS Find Potential Tax Evasion?
IRS auditors are well-versed in the most common fraud and evasion tactics. They look for specific red flags and common fraud indicators, known as badges of fraud.
Badges of fraud include the failure to file returns, hidden assets, understating income, poor or missing records, questionable explanations and refusal to cooperate with IRS auditors.
The auditor may scrutinize your deductions and write-offs, particularly those that are not well-documented. Comingling business and personal funds will raise a red flag, as will excessive spending habits. If your bank account activity does not match with your reported information, it may prompt the auditor to dig deeper.
What Is the Best Way to Avoid Tax Fraud or Evasion?
The most reliable way to avoid committing fraud or evasion is to be as accurate as possible when filing returns and dealing with the IRS and state tax authority. If the IRS or state tax authority is asserting that you committed fraud, you will absolutely need an experienced tax attorney.
If you do find yourself facing an audit, or if the IRS is alleging that you committed fraud, an attorney can help you prove that any errors were unintentional, rather than fraudulent. You may still have to pay penalties and interest, but you have a better chance of avoiding prison and huge fines.
Here at the Froisland Law Firm, I represent businesses and individuals in and around the Salt Lake City area in audits, negotiations and disputes with the IRS and the Utah Tax Commission. I also provide tax planning services, helping you minimize your tax debt and avoid fraud and tax evasion.