How to Report Tax Evasion by Your Business Partner

How to Report Tax Evasion by Your Business Partner

Having a business partner who engages in tax evasion can put you in a difficult situation. You want to do the right thing and report the illegal activity, but you also don’t want to destroy your business relationship or get yourself in legal trouble. This article will walk you through the steps for reporting tax evasion while protecting yourself.

Make Sure You Have Evidence of Tax Evasion

Before reporting your partner, you need actual proof they are evading taxes illegally. Some signs to look for:

• They insist on dealing only in cash, even for large transactions
• They keep two sets of books to hide income
• They drastically underreport income on tax returns
• They overstate business expenses on returns
• They maintain offshore bank accounts to hide assets

Gather as much evidence as you can of their activities – copies of books, records of transactions, etc. The more proof you have, the more credible your report will be. Just make sure to collect evidence legally and ethically.

Consider Speaking to Your Partner First

Before going directly to the IRS, you may want to delicately broach the subject with your partner first. Point out the legal risks of tax evasion and try to persuade them to come clean. They may not realize how serious tax fraud is. You can advise them to consult with a tax attorney about filing amended returns.

If they refuse and continue the illegal activity, you’ll have to report them. But at least you gave them a chance first. However, don’t warn them you plan to report them, as this could prompt them to destroy evidence.

File Form 3949-A With the IRS

To report federal tax evasion, Form 3949-A is the official route. This form allows you to report suspicious activity while remaining anonymous yourself. Complete the form with as much detail as possible about your partner’s violations and submit it to the IRS Criminal Investigation division.

To find the nearest CI office, visit the IRS website. You can print and mail the form, deliver it in person, or submit it electronically through the IRS website.

Consider Filing Form 211 With the IRS

Another option is submitting Form 211 to request a specific reward amount in return for your detailed information about tax evasion. This form requires you to provide very thorough documentation of how taxes are being evaded. It is more involved than Form 3949-A but could entitle you to a monetary reward if your report leads to your partner paying owed taxes.

Report State Tax Evasion to Your State Department of Revenue

In addition to federal violations, your partner may be evading state taxes as well. To report state tax fraud, contact the tax department for your particular state. For example, in California you would contact the California Department of Tax and Fee Administration. Your state department’s website will have information on how to file a report.

Consult With a Tax Attorney

Before reporting your partner, it may be wise to meet with a tax attorney yourself. They can advise you on the best approach, ensure your rights are protected, and guarantee you remain compliant with state and federal laws. An experienced tax lawyer can provide representation if you get caught up in any legal issues with your partner down the road.

Don’t Access Private Information Illegally

As you gather evidence against your partner, be very careful not to access any private documents or accounts without permission. Hacking into their computer files or email is illegal. Stick to gathering evidence from public sources or your own business dealings to avoid criminal charges yourself.

Be Prepared for Retaliation

Your partner may become angry and retaliate once they find out you reported them. They could try to implicate you in the tax fraud, threaten to end the business relationship, or even sue for damages. Anticipate these possibilities and have a plan to protect yourself.

Make copies of all evidence you submit to the IRS in case you need to defend yourself later. Also be proactive with clients and employees, letting them know you had to take official action against your partner’s illegal behavior but that it won’t impact the business. Having a tax attorney advising you can help guard against retaliation.

Don’t Feel Guilty for Doing the Right Thing

Reporting a partner, especially one you’ve worked with closely, can be emotionally difficult. But tax evasion harms both the government and honest taxpayers. It’s important to set aside feelings and focus on adhering to the law. You are doing the ethical thing by reporting illegal activity.

And keep in mind – you gave your partner a chance to change their actions. They chose to keep breaking the law. You should not ruin your own reputation or legal standing by assisting their tax fraud in any way.