Common Tax Evasion Schemes to Avoid

Common Tax Evasion Schemes to Avoid

Paying taxes is never fun, but it’s the law. Unfortunately, some people try to get out of paying their fair share by using shady or downright illegal tax evasion schemes. I want to walk you through some of the most common (and dumbest!) tax evasion tactics so you can avoid them. The last thing you need is to get in trouble with the IRS!

Abusive Tax Shelters

Some folks think they’ve found a “loophole” that lets them avoid paying taxes. These loopholes are really just abusive tax shelters that the IRS has ruled are bogus. For example, some people try to claim their personal expenses as business deductions. Nice try, but nope! Other shelters try to generate fake losses to offset real income and lower tax bills. The IRS is wise to these scams, though.

Bottom line: Don’t believe claims about legal loopholes that seem too good to be true. Do your research and make sure any tax planning strategy is legit [1].

Hiding Income

Some people try to evade taxes by hiding income. They don’t report or under-report income on their tax returns. For instance, a plumber might take cash payments and not claim them as income. This is tax evasion, plain and simple!

Other folks have offshore bank accounts or investments they don’t disclose. The IRS has ways of finding out about foreign accounts, though, and the penalties for noncompliance are steep. Don’t try to hide income offshore [2]!

Fake Business Expenses

Another common tax evasion scheme is to claim personal expenses as business deductions. For example, someone might say vacations, cars, and meals are for “client development” or other business purposes. But you can only deduct legitimate business expenses.

The IRS looks closely at expenses like travel, entertainment, and car use. Make sure you have detailed records proving expenses are truly for business purposes only. Otherwise, you could end up with penalties for excessive deductions [3].

Frivolous Tax Arguments

Some folks try to avoid paying taxes by making ridiculous claims. For example, they argue the income tax itself is unconstitutional or illegal. Others say paying taxes is voluntary or that only foreign income is taxable. These “frivolous tax arguments” have been thrown out of court over and over.

Don’t fall for these loony claims from shady tax protester groups. You can disagree with tax laws, but you still have to pay up. The IRS prosecutes frivolous tax avoidance schemes aggressively [4].

Abusive Trusts

Watch out for scammers promoting abusive trusts or offshore accounts as ways to avoid taxes. A promoter may claim you can put assets in a trust, disguise ownership, and avoid paying tax on the income. Or they might say you don’t have to report foreign accounts.

In reality, abusive trusts and offshore schemes are not legal tax avoidance strategies. Carefully vet any advisor recommending complex arrangements involving trusts, shell companies, or foreign accounts. These schemes often end badly [5].

Falsely Claiming Credits

Some tax cheats try to lower their tax bill by claiming bogus tax credits or deductions. For instance, they may claim fuel tax credits when they don’t actually use the fuel for business. Or they falsify records to claim credits for college tuition or adoption expenses they didn’t really have.

Only claim tax credits and deductions you’re truly eligible for. Make sure you have proper documentation in case the IRS asks questions. Otherwise, inaccurate credit claims can lead to penalties, interest, and prosecution.

Using a Fake SSN

Believe it or not, some individuals use a fake or stolen Social Security number to file their taxes. They think this will help them avoid outstanding tax debts, hide income, or improperly claim refunds. But the IRS catches on to this scheme pretty quickly in most cases.

Never, ever use a fake SSN on your taxes! This is considered identity theft and tax fraud. It can lead to serious criminal penalties beyond just owing back taxes and interest.

Paying Under the Table

Paying workers like housekeepers or contractors “under the table” (in cash without reporting it) is another common form of tax evasion. People think they’re helping someone avoid taxes or saving money themselves. But it’s illegal for both parties when the income isn’t reported.

Make sure any workers you pay file proper tax returns on the income. You should also issue 1099 forms reporting what you paid them. Otherwise, you could get hit with penalties for conspiring to evade payroll taxes.

Falsely Claiming Zero Income

Some tax protesters falsely claim they had zero income for the year. They file a “zero return” refusing to provide any financial information to the IRS. This is based on the loony argument that filing a return is “voluntary” for most people.

Don’t be tempted by rhetoric claiming you don’t have to file a tax return. The only exception is if you truly had no income for the year and don’t otherwise have a filing requirement. Falsely claiming zero income when you did earn money is tax evasion.

Padding Business Expenses

Many business owners are tempted to “pad” their expenses to lower their taxable income. For instance, they might claim personal meals, travel, or vehicle use as business deductions. Or they bill personal purchases to the business.

Make sure all your business expense deductions are legitimate. The IRS looks closely at travel, vehicle, and meal expenses in particular. Keep detailed records proving the business purpose for every expense you claim.

Not Reporting Cash Transactions

When people pay cash for goods or services, some businesses are tempted not to report that income. For example, a hair salon might pocket cash payments instead of recording them. Or a car dealer might accept cash “under the table” for a sale.

If your business receives cash payments, make sure to deposit the money and report it as income. The IRS looks closely at cash-based businesses to make sure all receipts are accounted for. Unreported cash transactions are a red flag for audits and potential tax evasion charges.

Bottom Line

I know paying taxes isn’t fun for anyone. But engaging in illegal tax evasion schemes is a terrible idea that often ends badly. You could end up owing huge fines, interest, and penalties on top of the back taxes you tried to avoid. Or even face criminal prosecution for tax fraud!

Do your homework and make sure any tax planning strategy is completely legit. If it seems too good to be true, be skeptical. Stick to taking only legal deductions and credits you’re entitled to. Report all your income accurately and file your returns on time. This is the best way to avoid trouble and sleep well at night!