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Being Careful In Navigating Between Tax Avoidance and Evasion

Most people think they pay too much in taxes and will do their best to avoid them, but few take that a step further into illegal tax evasion. Such was the case with Christopher B. Berg of Portola Valley, California. Mr. Berg worked as a consultant in 1999 and by 2000, had begun depositing parts of his income into an undisclosed Swiss bank account. After 5 years of doing this, he had transferred more than $640,000 out of the country. That was bad; worse was he used the cash during his trips to Europe, purchasing cars and obtaining cash while travelling. That conduct implicated that he was aware of his obligations to disclose the foreign bank account and report the income earned. On February 26, 2014 he was sentenced to one year and one day in prison followed by three years of supervised release. Prior to the sentencing Mr. Berg paid the IRS $250,000 as well as a $267,896 penalty for hiding the Swiss account he had in 2005.

So as far as tax evasion goes, where is the most peril?

It is fairly difficult to evade taxes on legitimate investments because the IRS can crosscheck the forms supplied by the company and the individual. Where people run afoul of the law is when they cut corners.

One of the most brazen tax dodges is not declaring income. This is difficult for anyone who receives a W-2 or 1099 form for money earned. The IRS receives those forms, too.

But for people in businesses that are cash-based, the temptation to cut corners and the belief that they will get away with it can be greater. I have seen this happen with bars and restaurants where cash has been diverted and literally put it into the backyard. You can’t divert income.

One of the giveaways for an IRS auditor is people living a lifestyle not possible given the amount of income declared. Another is bank accounts that show a deposit record of unreported income.

But the most frequent area for tax evasion for individuals comes from overstating deductions. It takes all forms, including brazen bids to cheat and efforts to push to the line of legality.

Some common examples include claiming too much for car use for work or a home office deduction, overstating charitable deductions and putting dependents on a tax return who are not true dependents. The IRS also scrutinizes returns tax returns showing refundable credits — like the earned income credit for people with children. Problems arise when people provide only partial support for nieces and nephews, or any amount for children who do not exist.

Where the IRS sees the same problems surface on different returns prepared by the same tax preparer, the IRS will go to that tax preparer and say give us every one of your returns for where you took a child care credit (or reported some other tax benefit) and audit them, too.

Another area of potential trouble is for people who lost their jobs in the recession and began working from home. They are entitled to deduct part of their home expenses as business expenses, but the issue is how much. To deter overzealous deductions, the IRS for the 2013 tax year created a standard deduction for a home office of $1,500.

The penalties for pushing tax avoidance into evasion depend on the severity of the offense.

There’s a fine line between conduct that rises to a potential charge for tax evasion and activities that don’t rise to tax evasion. It comes down to burden of proof. There has to be willfulness.

The penalties for criminal tax fraud are the most severe. This is where the most egregious undisclosed foreign bank account cases fall, like the ones when a person created a series of shell companies to mask the ultimate owner of an account. Penalties here include jail time.

The penalties for civil fraud are monetary and structured on a sliding scale, depending on the severity of the offense. But the penalties can run to 75% of the taxes owed. With the undisclosed foreign bank account cases, additional penalties come from not filing forms telling the IRS that a foreign bank account exists.

What should you do?

Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

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