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How Federal and State Governments Prove You Willfully Engaged in Tax Evasion

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    Ever notice how many tax crimes convictions the state and federal government publicizes during tax season?  I can confirm that they intentionally make a concerted effort to drastically increase enforcement efforts, criminal investigations, and ultimately indictments and convictions of taxpayers and especially tax preparers who aid and abet evasion to coincide with tax season.  Both federal and state taxing authorities seek to deter tax crimes by making an example of a broad spectrum of tax cheats across multiple industries and tax brackets. Being found guilty of tax evasion ordinarily results in years in prison, draconian restitution orders, and potentially the loss of your livelihood if your profession has a moral character requirement depending on the severity of your offense.  The negative publicity alone can kill a previously viable business.

    If you find yourself under audit when you know for a fact you cheated on the individual or entity return(s) under audit or facing a federal or state criminal tax investigation, we have a tax defense and accounting team that will always keep your best interests at heart.  The dually licensed California Tax Attorneys and CPAs at the Law Offices of David W. Klasing have extensive experience and deep expertise in representing taxpayers facing tax evasion allegations or mere exposure of it. Our legal team has decades of combined experience with tax evasion and tax crime cases. Enabling us to utilize our skills and experience to produce the most advantageous legal outcome for your case as possible under the circumstances. Our firm is here to describe how the government typically go about attempting to prove beyond a reasonable doubt that you engaged in tax evasion.

    How the Government Defines Tax Evasion

    Tax evasion is one of the most common and most costly crimes in the United States. The Internal Revenue Service (IRS) defines tax evasion as an offense where a person willfully makes an effort to evade taxes imposed by the United States. There are three elements necessary to prove that a defendant committed tax evasion:

    1. The defendant committed an intentional act to evade tax liability or to avoid paying their tax debt.
    2. The taxpayer has been assessed for an additional tax that is due and owed to the government.
    3. The defendant exhibited willfulness when engaging in tax evasion.

    Once the government has gathered sufficient evidence to be able to prove the above elements in a criminal court, you risk being found guilty by a jury of your peers, or more commonly pleading guilty to tax evasion as part of a plea bargain. This leads to potentially being sentenced to years in prison and often complete financial devastation. That is why you need a dually licensed California Tax Attorney and CPA to help you through a potential tax evasion case from the very outset.

    When is Tax Evasion Willful?

    Normally, the IRS seeks to prove the requisite willfulness element by using indirect evidence rather than direct evidence—like the taxpayer’s admission or confession—since direct evidence is rarely obtainable. That said, the Supreme Court allowed the willfulness requirement to be inferred from “any conduct, the likely effect of which would be to mislead or to conceal.” Spies v. United States, 317 U.S. 492, 499 (1943).

    Since this case occurred, there are dozens of other cases that grapple with the definition of a willful act of tax evasion. In some cases, the court may give the jury an instruction for willful blindness, which states that a defendant could be found guilty if they shielded themselves from vital information that would show they committed tax evasion.

    Alternatively, the court may also examine whether taxpayers acted with a “reckless disregard” of whether they engaged in tax evasion.

    As there is no bright-line test for when tax evasion is willful, the evidence used to prove guilt will be based on the actions of the defendant and reasonable inferences that can be drawn from it. For example, if the defendant purposely hid their assets with nominee entities, this may be a clear sign that there was willfulness in their actions.

    The dually licensed California Tax Attorneys and CPAs at our firm would be able to provide you with more information about how the government may choose to handle your case and their methods of proof like:

    Net Worth Method:

    Under the net worth method, the taxpayer’s net worth (total assets minus total liabilities) at the end of one year is compared with his or her net worth at the end of the next year. The method calculates net income for a year by measuring the increase in net worth over a particular year which is reduced by any nontaxable sources of income received by the taxpayer such as loan proceeds or inheritances. The agent then compares the taxable income reported for the year being tested with the results of the net worth computation and thereby identifying any unexplained increase in net worth for the year tested as unreported income.

    Expenditures Method:

    The expenditures method for uncovering omitted income is like the net worth method and is sometimes referred to as the cost-of-living test. This method focuses on the amount of income needed to cover the taxpayer’s identified personal expenditures for the year being tested. The agent totals all the identified personal expenditures of the taxpayer for the year tested and reduces the total by any nontaxable sources of income used to pay for the expenditures. Since one possible source of nontaxable income for the expenditures tested is wealth acquired and taxed in previous years, the agent must take into consideration all of the taxpayer’s assets and liabilities at the start of the prosecution period, in the same manner as in a net worth case. Commonly the IRS combines the net worth and personal expenditures methods to assure that its computations reflect the income used to purchase assets as well as the income used for personal expenditures.

    Bank Deposits Method:

    Taxpayers who run Schedule C businesses and make periodic deposits to at best, a business bank account, and at worst, a commingled personal account, are typically investigated by the IRS using the bank deposits method. The agent totals deposits to all accounts (bank and brokerage) under the taxpayer’s control and then eliminates any deposits from identified nontaxable sources, such as gifts, loans, and transfers between accounts. The adjusted total of deposits is considered income. The IRS uses these methods to establish an income-producing business which allows the jury to infer how the unreported taxable income was generated. This method is also commonly used for businesses run through entities such as LLCs, S and C Corporations, and Partnerships.

    Specific Item Method:

    Under the specific item method of proof, the government attempts to show that the taxpayer’s return at issue inaccurately reflects a specific transaction, or set of transactions, such that income is omitted, deductions are inflated, or a source of income is falsified. The government is not burdened with having to prove an exact amount of unreported income to prevail but rather must prove that a substantial amount of income was unreported.

    Types of Willful Tax Evasion

    Generally, there are two categories of tax evasion that may result in a person being charged with a crime: evasion of assessment and evasion of payment. If a taxpayer engaged in any of the actions listed below, they would likely be deemed to have willfully evaded their tax obligations.

    Evasion of Assessment

    Evasion of tax assessment means that a person has taken steps to conceal the accurate amount of their tax liability from the IRS. For instance, if a taxpayer files a return and omits the income they earned when operating a cash-only business in addition to their job, this would be a prime example of an evasion of assessment crime.

    There are many other methods a taxpayer might employ to evade the assessment of taxes:

    • Concealing various sources of income
    • Creating multiple ledgers of their finances to hide their income
    • Destroying documents regarding finances
    • Hiding employee wages by paying them in cash
    • Making fraudulent statements to the IRS and its agents and coercing employees to lie to the IRS
    • Producing falsified invoices
    • Utilizing independent contractors or misclassifying employees as contractors to avoid tax withholding

    If you engaged in any of these acts or other methods of tax evasion, do not wait to call a California tax attorney and CPA that could aid you with this matter.

    Evasion of Payment

    An offense for evasion of tax payment is when a taxpayer tries to avoid paying taxes that have been assessed by the IRS or another taxing authority. The most common way that this offense is committed is by concealing assets that could be used to pay the tax that is owed.

    To show that a defendant engaged in the evasion of payment, the government could look to discover and present evidence of the following:

    • Avoiding the use of credit cards, checks, and other forms of payment that may leave a paper trail
    • Changing the ownership of their assets to family members and others
    • Creating a bank account with fraudulent information like a fake name or false social security number
    • Funneling personal income or debt to others
    • Laundering money through foreign financial accounts
    • Opening safety deposit boxes under fake names to hide jewelry, gems, and other valuable personal property
    • Using other people’s bank account to hide money and assets

    There are a variety of other tactics that may be used to evade taxes by a person.

    Call Us to Learn How the Government May Try to Prove You Committed Willful Tax Evasion

    If you at risk of being charged with tax evasion because of a federal or state civil audit, eggshell audit or reverse eggshell audit or criminal tax investigation, quickly contact a dually licensed California Tax Attorney and CPA to guide you through this difficult case. The Tax Law Offices of David W. Klasing know civil and criminal liability for tax evasion and other tax crimes is a formidable burden for a taxpayer to handle, but you do not have to face the taxing authorities and their investigators without legal defense and accounting representation. To talk to a member of our law offices about your case, call us at (800) 681-1295 for a confidential consultation on schedule online HERE.

    Note:  As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

    It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process.  Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

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