What are signs the IRS considers tax evasion to be criminal?

Signs of Criminal Tax Evasion According to the IRS

Paying taxes is a civic duty, but some people try to avoid doing so through illegal means. Tax evasion refers to illegally not paying taxes owed, usually by underreporting income, overstating deductions, failing to file returns, and other schemes. While minor errors typically just lead to back taxes and interest owed, intentional and substantial tax evasion can cross the line into criminal conduct.

So how does the Internal Revenue Service (IRS) determine when civil tax issues become criminal? There’s no bright line, but there are some clear signs that could trigger criminal charges and prison time.

Hiding Income

One of the most common tax crimes is simply not reporting income in order to lower tax liability. Examples include:

• Failing to report cash earnings
• Not reporting income in foreign bank accounts
• Skimming cash from a business without recording it

Intentionally hiding any income source from the IRS is considered tax evasion. The more money and the longer period of time over which income goes unreported, the more likely criminal charges. Even a single year of substantial unreported income can warrant charges.

Fake Deductions and Exemptions

Another way tax evaders try to cheat is by claiming deductions and exemptions they don’t qualify for. For instance:

• Claiming dependents who don’t qualify
• Deducting personal expenses as business expenses
• Grossly overstating charitable giving amounts

Falsely reducing tax liability through fake deductions and exemptions constitutes criminal tax fraud if done intentionally. As with hiding income, larger amounts and longer time periods can increase liability.

Using False Documents and Identities

Filing tax returns with fake paperwork or under false identities is a clear sign of criminal conduct. Examples include:

• Creating fake W-2s and 1099s
• Filing using a stolen Social Security number
• Filing under a false business identity

Using falsified documents often goes hand-in-hand with hiding income and claiming fake deductions. Even a single instance can warrant prosecution.

Threats and Physical Force

In egregious cases, tax evaders try to use threats or violence to avoid consequences. Examples include:

• Threatening auditors examining returns
• Assaulting an IRS collections officer
• Filing bogus property liens against IRS employees

Using force or threats against IRS personnel will not be tolerated and will swiftly lead to criminal charges.

Tax Protester Schemes

Some people protest tax laws by filing returns based on bizarre, invalid legal theories claiming taxes don’t apply to them. Examples include:

• Filing returns reporting zero income
• Attempting to pay taxes with fake financial instruments
• Filing a return claiming the First Amendment shields them from taxes

Judges have consistently thrown out these tax protest arguments. Continuing to file returns based on them can constitute criminal conduct.

Failure to File Returns

In some cases, not filing returns at all is an attempt to evade taxes. While a single late return usually just generates penalties and interest, repeatedly failing to file can trigger criminal charges. The IRS considers factors like:

• Number of years no return filed
• Amount of unreported taxes owed
• Obtaining refunds while failing to file

If an investigation shows a pattern of failing to file returns and report substantial income tax owed over multiple years, charges may result.

Obstructing Collections

Tax evaders often continue avoiding taxes owed even once the IRS detects the non-compliance. Examples of obstruction include:

• Transferring assets to conceal ownership
• Providing false information about assets and income
• Sending funds offshore to hide them

Obstructing the IRS from assessing and collecting owed taxes can constitute criminal violations on top of the original tax evasion.

Common Criminal Charges

Tax evaders face a variety of potential criminal charges depending on their specific conduct. Common charges include:

• Tax Evasion: Intentionally attempting to evade assessing, paying or collecting taxes owed.
• Filing a Fraudulent Return: Willfully filing a tax return containing false information.
• Obstructing the IRS: Corruptly impeding IRS administration through threats, force or deceit.

Convictions can result in substantial fines and years in federal prison. Tax crimes often also involve related charges like mail fraud, money laundering, and conspiracy.

Defending Against Tax Evasion Charges

Facing criminal tax charges can be frightening, but an experienced tax attorney can often negotiate reduced penalties or even avoid charges altogether. Common defenses include:

• Lack of intent: Arguing deficiencies were accidental errors rather than willful deception.
• Reliance on professionals: Demonstrating accountants contributed to filing incorrect returns.
• Diminished mental capacity: Showing mental or emotional issues hindered filing proper returns.

An attorney can also negotiate repayment plans and settlements with the IRS to avoid criminal prosecution. But working cooperatively with tax authorities is key – obstruction and deceit at this stage only make matters worse.

Avoiding Tax Evasion Charges

While the tax code is complex, avoiding criminal tax charges comes down to honestly reporting income and deductions. If the IRS suspects tax problems, working transparently to address errors and pay any back taxes owed can also mitigate risk. But knowingly hiding substantial income or falsifying deductions is asking for prosecution.

Paying taxes is rarely fun, but engaging in intentional and serious tax avoidance crosses the line. If concerned your creative accounting might catch the IRS’s attention, consult with a tax attorney before you end up facing jail time!