Running a business is expensive. It’s not difficult to understand why business owners look for ways to lessen their tax liability. Some may be surprised to learn that tax avoidance is a totally legal practice. This term refers to practices that reduce one’s taxable income using methods within the law. However, tax evasion is a different matter entirely. Tax evasion is an illegal practice that involves misrepresenting one’s income to deceive the IRS. Tax evasion is always a crime, but it is frequently mistaken for tax avoidance. Here are some common examples of tax evasion that are unacceptable under any circumstance.
Underreporting Income
This is the most straightforward method of tax evasion. Income is underreported anytime business files tax returns that reflect less income than was actually earned. This also occurs when a business file returns reflecting credits, deductions, and exemptions that it is not eligible for. Since so many transactions occur electronically, expert witness finance testimony often makes short work of these cases.
Pyramiding
When a business withholds payroll taxes from its employees but neglects to pass the funds on to the IRS, that business has engaged in pyramiding. This practice is often the realm of habitual offenders. Since it is difficult for a business to consistently fail to remit payroll taxes to the IRS, lawbreakers typically file bankruptcy to eliminate their liability. Once this happens, they open a new enterprise and repeat the process.
Falsifying Accounting Documents
To make their job easier, accountants send their clients a pre-prepared document where the necessary information for a tax return can be filled in. A business might decide to fudge the numbers, omit an account, or fail to report capital gains. While this is not the accountant’s fault, the business has committed tax evasion by misrepresenting its tax liability.