Types of tax evasion

types of tax evasion

Types of tax evasion are

  • Tax Evasion on Income Taxes
  • Participating in Trust Schemes
  • Business Tax Evasion

Each form is differentiated by the nature and scope of the violation. Not paying your proper tax liability could land you in prison, with willful tax evasion generally considered a felony.

There is a corresponding form of tax evasion for every type of taxation. It is also important to note that ignorance of tax laws or an incorrect interpretation of the Tax Code does not necessarily qualify as a tax evasion violation. Establishing intent before a person or an entity is charged is important.

The article below further explains each of the types of criminal tax evasion.

Tax Evasion on Federal Income Taxes

First, it is important to establish the difference between tax evasion and tax avoidance. Tax evasion requires you to willfully conceal or improperly report information regarding your income from tax authorities. On the other hand, tax avoidance simply refers to legal strategies to reduce your tax bill.

Actions that constitute income tax evasion

Below are some of the activities that could be considered willful attempts to evade taxes:

  • Failure to file returns.Not filing your income tax returns is already a violation of the tax code. The penalty starts with 5% of the outstanding federal income tax for every month that it’s late, without exceeding 25% of the back taxes.However, it is not inherently equivalent to tax evasion. The federal government needs to establish that the failure to file is a part of an active effort to conceal or mislead the authorities.
  • Falsifying recordsIf you report your income tax return yet exaggerate details to enjoy larger tax deductions, then you are committing tax fraud. Tax fraud refers to intentionally avoiding your tax liability. In this case, through misrepresentation of income and taxation details.Committing tax fraud can get you fined up to $100,000 and a sentence of up to three years in prison. This is slightly lighter compared to outright tax evasion, which could land you up to five years in prison.
  • Claiming a second addressThis is a common strategy people use to try and defraud the IRS. By claiming a second address different from their default tax filing address, they can avoid paying taxes for a particular state or territory.Again, note that establishing that the reporting of a different address to mislead or hide from the tax authorities willfully can qualify as tax evasion.
  • Reporting personal expenses as business expensesFor employed people, accurate and truthful reporting of expenditures is required. Certain expenses, such as travel and accommodation for business trips, can be written off as being incurred for businesses. These are not considered under taxable income.However, make sure that every item you list as a business expense is actually qualified under the existing tax law. Underreporting income through unqualified deductions also falls under tax evasion once intent has been established.

Participating in Trust Schemes

Trust schemes are inherently legal. They refer to arrangements where one party acquires all assets of another party or when one side holds or manages the assets of another in a trust fund.

However, abusive trust schemes are deliberate efforts that supposedly transfer money and assets into another person’s possession but do not complete the agreement. There are elaborate systems where a series of transfers occur but ultimately remain in the hands of the original owner.

The IRS explains that abusive trust schemes come in to types. The first one is a domestic version limited to trusts created in the country, while the other one is foreign, which moves assets in and from foreign holdings. Both types use vertically-layered trusts, paying and deducting expenses (often falsified). It distributes the remaining to the next layer, which repeats the process.

Abusive trust schemes generally fall under the jurisdiction of the IRS Criminal Investigation Division to identify both the perpetrators and the taxpayers using this system to cut down on their taxes paid drastically. Both investors and promoters, when found guilty, can face fines of up to $250,000 and up to five years in prison.

Business Tax Evasion

Generally, business accounts can be charged with tax evasion if they willfully misstate the company’s income or expenses.

Business expenses simply refer to the expenditures incurred by the company as it operates. It includes utilities, rents, raw materials, employee compensation benefits, etc. One common form of a business owner avoiding taxes by hiding money from taxes withheld from employees. Businesses can withhold a portion of the employees’ income for taxation purposes. Another common practice is to file fraudulent payroll information. Also, some business dealings involve outsourcing certain processes to pass tax liabilities and misrepresent compensation and benefits expenses.

A common form of tax evasion for small business owners is through sales tax. Some of them intentionally avoid reporting income to pay less taxes. Meanwhile, some retailers collect sales tax reimbursement from customers but do not report this collection to the IRS. There are even recorded instances of stores arranging fake out-of-state transactions to minimize tax liabilities and reduce prices.

Things to Remember Before Attempting Tax Evasion

Aside from dealing with a guilty conscience, it helps deter thoughts of committing a potential felony by remembering the following facts.

  1. The IRS can conduct auditsTake note that once the Internal Revenue Service finds probable cause that you might be up to something with your taxes, they can conduct an audit. This investigation is usually spurred by non-payment of taxes, incorrect information, or discrepancies in your taxes paid.
  2. Violations can cause you to lose tax creditsIf the IRS finds that you’re not paying the correct taxes and don’t deserve the Earned Income Credit (EIC) granted to you, two things can happen. It’s either you pay back the EIC or forfeit claiming EIC for two years. This forfeiture extends to ten years if the IRS establishes that you fraudulently and wilfully took credit.
  3. Professional help means added expensesOnce you’re subjected to an IRS audit, or face lawsuits from the revenue service, you will need to enlist the services of a professional. Whether it’s an accountant who’ll serve as your tax preparer or a taxation lawyer checking your legal duty, you will need specialized professionals to pay for their services. All expenses incurred are otherwise avoidable if you pay the correct taxes.
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