No one likes to pay taxes, but they are necessary to provide revenue to federal, local, and state governments to fund essential services. If someone isn’t paying their fair share, or is avoiding paying their taxes altogether, it might upset those around them who are paying their fair share. Information about what to do if someone reports you to the IRS for tax evasion is listed below.
What is Tax Evasion?
The Internal Revenue Service (IRS) defines tax evasion as, “the failure to pay or a deliberate underpayment of taxes”. It can involve misrepresenting your income, purposefully inflating your deductions, not reporting all applicable business transactions or hiding money in untraceable accounts.
Some common examples of tax evasion include:
- Paying household employees under the table. If you’re going to pay a household employee, like a nanny or a cleaner, that money needs to be reported on a W-2 form.
- Reporting personal expenses as business expenses. While certain business expenses are tax-deductible, personal expenses are not.
- Underreporting cash transactions. If you run a cash-based business, all transactions need to be reported to the appropriate tax authorities.
- Ignoring income from international sources. If you do business internationally, you still need to report that income.
- Overstating your deductions. You need to have proof, such as receipts, for all of your eligible deductions. It’s not a good idea to estimate them.
What Happens If Someone Reports Me to the IRS for Tax Evasion?
When someone reports you to the IRS for tax evasion, the first step that the agency takes is to evaluate the information provided by the whistleblower. The IRS has a whistleblower program that rewards individuals who provide information about tax fraud, and they take and investigate these claims seriously. The IRS uses a variety of tools to investigate tax evasion, including reviewing tax returns, analyzing financial records, and conducting interviews with taxpayers and third parties.
The IRS may also conduct a tax audit, which is a review of your tax return to ensure that you have accurately reported your income and claimed only legitimate deductions and credits. During an audit, the IRS may request documentation to support the information on your tax return, such as band statements, receipts, and invoices.
If the IRS determines that you did, in fact, commit tax evasion, they will take action against you. This can include imposing fines and penalties, seizing assets, and even prosecuting you for a criminal offense. The severity of the penalties will depend on the extent of the tax evasion and whether or not it was intentional.
What Are the Penalties for Tax Evasion?
Penalties for tax evasion can be extreme. If you are found guilty, you could face a penalty of up to 75% of the taxes owed, in addition to interest on the unpaid taxes. If the IRS determines that you willfully committed evasion, you could also face criminal charges, which could result in fines of up to $100,000 and five years in prison.
What Should I Do If the IRS Decides to Investigate Me?
If you are facing an audit or an investigation, it is imperative that you seek the advice of a qualified and experienced tax attorney. A tax attorney can help you navigate the audit process, prepare your financial statements, and negotiate with the IRS on your behalf. They can also advise you on how to protect your rights and minimize the penalties you may face.
There are some steps you can take to protect yourself in the face of an investigation or audit, they include:
- Gathering all of your financial records, including tax returns, bank statements, and receipts. Reviewing them to make sure you’ve properly recorded your income and claimed legitimate deductions. You can file an amended tax return if you determine that there are errors.
- Being cooperative with the IRS. Provide them with any information they request and respond to them in a timely manner. If you do not cooperate, there could be additional penalties levied against you.
- Again, consulting with an experienced, qualified tax attorney, like those at the Law Offices of Robert J. DeGroot.
If you or someone you know is facing an IRS investigation for tax evasion, contact the Law Office of Robert J DeGroot to find the help and advice you need.
