Allegations of tax fraud are a serious matter. Unfortunately, there are times the actual commission of this crime may not be as obvious as we would think. When we envision people committing tax evasion, we likely think of someone who uses ill-gotten funds that are kept hidden from the Internal Revenue Service (IRS) to support a lavish lifestyle.
This is not always the case. The IRS considers acts to understate or conceal assets as well as improper claims of credits or exemptions as acts of tax evasion. This means that tax planning strategies that help reduce tax obligations could cross the line into tax evasion.
When can tax planning cross the line into tax evasion?
One example is the use of tax shelters. Although some options are perfectly legal, others are not. A tax shelter is often a legit legal tool that allows taxpayers to reduce their taxable income while also offering some financial benefit. As a result, a valid tax shelter will likely serve a purpose while also reducing taxable income. A good example is a pension.
In contrast, a fraudulent one will reduce taxable income without serving an economic purpose, like a bogus insurance policy.
What does tax evasion look like?
In a recent example, the Department of Justice (DOJ) accused a Georgia bar owner of tax evasion. Representatives for the DOJ state the owner underreported gross receipts and filed false corporate tax returns. They also state he underreported his own income on his personal tax filings with the IRS. When faced with the evidence, the bar owner chose to accept a plea deal and now faces up to five years imprisonment, mandatory restitution or repayment of owed taxes and interest as well as additional monetary penalties.
How does the government decide if there was an honest mistake or criminal tax evasion?
These cases often hinge on the matter of intent. Was the issue one resulting from an honest mistake, or an intentional choice? The answer to that question will directly impact the potential penalties and charges.