Tax evasion is a serious financial offense that involves individuals or entities deliberately misrepresenting their income or financial activities to reduce tax liability. This illegal practice can lead to significant legal consequences, including fines and imprisonment. It is extremely important that small business owners know how to properly navigate the fine line between lawful tax savings and unlawful tax evasion.
What is tax evasion?
The first step is having a firm understanding of the crime. Tax evasion is a deliberate underreporting of income such as falsifying records to reduce tax liability. While tax savings are legal and involve using the tax code to your advantage, evasion is a criminal act. Business owners must understand the distinction to avoid legal pitfalls.
What are the consequences for tax evasion?
Penalties can include hefty fines that may exceed the original tax owed as well as criminal charges leading to imprisonment. The legal system takes tax evasion seriously, and so should business owners. The risk of cutting corners is not worth the potential damage to one’s reputation and business continuity.
In a recent example, the United States Attorney’s Office moved forward with allegations of tax fraud against a small business owner. The prosecution claimed the business owner failed to withhold and pay payroll taxes to the Internal Revenue Service (IRS) and falsified tax returns. When presented with the evidence, the business owner chose to accept a plea deal. He has pled guilty to filing a false individual tax return. This was likely in exchange for the dismissal of multiple other criminal charges had he moved his case forward. Penalties may include repayment of tax obligations, in this case an estimated $900,000, as well as up to three years imprisonment.
How can I avoid allegations of tax evasion?
The following tips can help to better ensure you stay on the right side of the law:
- Record keeping. Keep accurate and complete financial records. This will help you make the most of available tax savings while also providing evidence to back up your claims if you become the target of a tax audit.
- Delegate. The tax code is complex, and it is not always easy to ensure that you are getting the most out of legal savings. It is helpful to have a professional guide you through the process.
Even when business owners take these steps, the IRS may flag your account for an audit.
It is important to take the audit process seriously. Know that you can seek legal counsel whether looking for help at the outset or after getting questionable results. An attorney experienced in this area of the law can review your case and advocate for your interests, better ensuring a more favorable result.