Common and Concerning Tax Law Questions and Answers

Whether you are a new or experienced business owner, you will likely encounter tax questions that require timely answers. Many business owners do not think about criminal tax issues until they receive a letter from the Internal Revenue Service (IRS), face an unexpected penalty, or learn they are under audit. It is far better to understand tax obligations in advance than to wait until facing a tax audit, investigation, or penalties from the IRS.

Three frequently asked business tax questions

What are the differences between tax fraud, tax evasion, and money laundering?

There are several ways an individual or business can violate tax law, making it important to understand the differences between common criminal tax issues. Three main categories include:

• Tax fraud. Any attempt to deceive the IRS regarding your actual tax liability, including claiming an extra deduction, false tax credit, or hiding assets. This common type of tax crime is robustly pursued by the IRS.
• Tax evasion. A deliberate effort to evade your tax liability. This could take the form of underreporting and underpaying on your tax returns, hiding sources of income, and falsifying documents and receipts, among other things. Prosecution for these actions usually involves fines that allow the government to recoup the loss of rightful tax revenue.
• Money laundering. Using deceptive practices to move or launder money away from its ill-gotten source into a legitimate financial setting. Shell companies and tax havens are prime means by which money is laundered around the globe. The IRS reports a conviction rate exceeding 90 percent in criminal tax cases.

What is an IRS Badge of Fraud?

To initiate an IRS criminal tax investigation, the agency first evaluates the actions of an individual for indicators of a crime. The IRS flags potentially fraudulent behavior as a “badge of fraud.” For taxpayers, understanding which actions the IRS raises concerns about fraudulent behavior can be helpful, as these indicators often elevate a routine audit into something more serious.

These actions are generally categorized as follows:

• Income: Omission of income or specific income exclusions, concealment of income sources. or fake descriptions.
• Deductions and expenses: False deductions, fabricated business expenses, improper dependents, or falsified receipts or documents.
• Bookkeeping and allocations: Keeping no records or a double set of records.
• Conduct: Submitting false statements, failure to disclose relevant facts, or obstructing an examination through noncooperation or other tactics.

Tax Havens: What are the pros and cons?

Offshore banking is a legal and oftentimes profitable practice to protect and grow your wealth. When used with compliance in mind, offshore tax jurisdictions and foreign bank accounts can offer valuable advantages. As enforcement activity continues, however, misuse of offshore tax structures can result in an IRS audit or even a criminal tax investigation when used to evade taxes or launder money.

When researching investment strategies, consider the pros and cons of offshore investing. An advantage is that offshore and foreign bank accounts offer privacy for individuals, families, and other entities who prefer to keep their financial profiles discreet. They also may be used to protect assets from exposure to legal actions, destabilized currencies, or economic instability in other parts of the world.

The downside is that offshore accounts can create significant legal exposure if they are not properly disclosed to the IRS. Failing to report foreign accounts or income can lead to substantial penalties, audits, and even criminal allegations.

These are only a few of the issues business owners ask about. If you want to take a deeper dive into your business taxes and how to deal with them, we offer a complete guide online, Since You Asked: 15 Common and Concerning Tax Law Questions & Answers. In addition, we offer several other guides that address related tax law topics that are available on our website.

Need additional help with tax-related matters?

If you are already facing tax litigation, an unexpected penalty, or allegations of tax crime, contact Robert J. Fedor at 440-250-9709 for individualized assistance. Our tax and criminal tax defense law firm has the experience you need to help you through this difficult time. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.