Warning Signs You May Have a Tax Evasion Problem

Warning Signs You May Have a Tax Evasion Problem

Do you ever feel anxious when tax season rolls around? Do you find yourself avoiding calls from the IRS or hesitating to open letters addressed from the taxman? Well, you’re not alone. Plenty of folks get a little nervous about doing their taxes correctly. But if you’ve noticed some of these warning signs, you may have crossed the line from everyday tax anxiety into more serious tax evasion territory:

You Haven’t Filed a Return in Years

Ok, this one is pretty obvious. But it bears repeating: if you haven’t filed a tax return in several years, you almost certainly have a tax evasion problem. The IRS requires all Americans to file returns reporting their income, and failure to do so for multiple years is a huge red flag. The IRS will eventually catch up to you and hit you with big penalties for each year you skipped out on filing. Take care of this ASAP before things get worse.

You Only Deal in Cash

If you’ve switched your whole life over to cash – you only accept cash payments for your business, you withdraw cash instead of using cards, you pay cash for big purchases like cars – it’s likely you’re trying to avoid creating a paper trail the IRS can follow. Dealing exclusively in cash makes it easier to hide income and dodge paying taxes. But it’s also pretty suspicious behavior that could land you in hot water if you get audited.

You Have Offshore Bank Accounts

Setting up secret accounts in tax havens like the Cayman Islands or Switzerland used to be a popular way for wealthy folks to hide money from the IRS. But in recent years, the U.S. has really cracked down on offshore tax evasion with stiffer penalties and more reporting requirements. Just having money stashed in an offshore account can look pretty shady, even if you claim it’s for legitimate reasons. Tread carefully here.

Your Lifestyle Doesn’t Match Your Reported Income

Are you living large while claiming very modest earnings on your tax returns? Driving luxury cars, living in a massive house, and taking lavish vacations will all raise suspicions if the income reported on your 1040 doesn’t support that lifestyle. The IRS pays attention to things like properties owned and expensive purchases you make. If your spending far exceeds your reported income, expect an audit.

You Have a Complex Business Structure with Lots of Pass-Through Entities

If your business involves multiple LLCs, S-corps, partnerships, and trusts, you may be using this complicated structure to improperly reduce tax liability or hide funds. While these entities themselves aren’t illegal, setting up a maze of them to conceal earnings or reduce taxes can cross into evasion territory. Make sure your tax preparer is experienced with these structures to avoid trouble.

You Claim Suspicious Deductions

Do you take aggressive or questionable deductions on your return – things like 100% business use of a vacation home, or write-offs for lavish meals and entertainment? The IRS looks closely at deductions that seem inflated or improper. You may end up owing back taxes and penalties if you get caught taking deductions you aren’t entitled to. Work with a tax pro to ensure your deductions are fully allowed.

You Have Unreported Foreign Income

If you own foreign assets or have income tied to foreign accounts, corporations, or investments, you must report this to the IRS even if the money never entered the U.S. Failing to disclose offshore income or assets on required forms like the FBAR can lead to massive penalties for tax evasion. Don’t mess around with unreported foreign income – the IRS has powerful tools to catch offshore tax cheats.

You Fail to Report Cash Income

It’s tempting for small business owners to pocket cash payments and not report that income on their taxes. But keeping cash earnings off the books is a risky form of tax evasion. If you own a cash business, make sure you’re keeping careful records and reporting all income. The IRS may cross-check your bank deposits against your reported earnings to look for unreported cash.

You Have a History of Tax Issues

If you’ve been flagged for tax evasion or other IRS violations in the past, you’re on the agency’s radar for future issues. Once you have a track record of tax problems, any questionable activity could trigger an audit or investigation. Be extra careful to dot your i’s and cross your t’s if you have a history of tax trouble.

You Failed to Report Crypto

The IRS is cracking down on unreported income from cryptocurrency trading and transactions. If you’ve invested in crypto but didn’t report gains or losses on your taxes, you could face penalties for tax evasion. The IRS even sent letters to thousands of taxpayers asking about their crypto activity. If you skipped reporting crypto activity, consider amending past returns.

You’re Engaging in Abusive Tax Shelters

Complicated tax shelters and schemes promising to eliminate your tax burden are usually too good to be true. These abusive arrangements, like hiding income in phantom offshore corporations or trusts, can cross the line into criminal tax evasion. Avoid any tax strategy that seems shady or promises outlandish results.

You Have Large, Unexplained Deposits

If you’re making large bank deposits that don’t align with your reported income or business activity, it can raise red flags for the IRS. You may get questioned about where the mystery money is coming from and whether it represents unreported income. Always be prepared to show the source of any unusually large deposits or transfers.

You’re Not Withholding Enough

Claiming excessive allowances on your W-4 to reduce tax withholding is a form of tax evasion. You may get away with it in the short term, but you’ll end up owing taxes plus interest and penalties down the road. Make sure your withholding is accurate based on your actual situation. Under-withholding when you know you owe more taxes is illegal.

You Failed to Report Major Transactions

Did you sell real estate, receive a large inheritance or gift, liquidate investments at a profit, or have some other big transaction without reporting it on your tax return? The IRS gets notifications of many large transactions, so you can’t just pretend they didn’t happen. Failing to report material transactions is a red flag for evasion.

You’re Running a Cash Business without Licensing

If you operate a cash business like contracting, retail, restaurants, etc. without proper business licensing, you’re already on shaky ground. Unlicensed businesses have fewer paper trails, making it easier to hide income. Getting caught without licenses can make tax evasion charges more likely and more severe.

You Have No Records to Support Your Return

Meticulous record-keeping is key if you want to prove your tax return is accurate. Lacking documentation to back up your reported income, deductions, withholding, and other return information looks suspicious. The IRS may disallow deductions or assess penalties if you can’t provide records.

You’re Not Reporting Rental Income

If you rent out a home, apartment, or other property but haven’t included the rental income on your tax return, you could face tax evasion charges. The IRS expects you to report all income, including from side activities like renting property. Keep careful records and report this income.

You Have a History of Frivolous Tax Arguments

Have you tried arguing you don’t have to pay taxes for bizarre reasons, like tax laws are unconstitutional or only voluntary? The IRS identifies these “frivolous tax arguments” and cracks down hard on taxpayers who use them. If you’ve taken this path before, your risk of criminal charges for further evasion is high.

If you recognize some of these warning signs in your own tax situation, don’t panic – but do take action. Come clean as soon as possible, consult experienced tax counsel, and get compliant with the IRS. The sooner you deal with any tax issues, the better. Continuing to evade taxes will only make things worse in the long run, both financially and legally. Don’t become a tax evasion statistic – protect yourself instead.

Sources:

How to Know It Is Time to File Past Due Tax Returns

Cash Intensive Businesses Audit Techniques Guide – Chapter 5

Comparison of Offshore Tax Evasion Penalties

Abusive Tax Shelters and Transactions

IRS Reminds Taxpayers to Report Virtual Currency Transactions

Unreported Income from Rented Real Estate