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Busted! Don’t Believe These Tax Evasion Myths!

Author: Vilensky & Company, LLC | | Categories: Accounting Services , Bookkeeping Services , Tax Accountant

Blog by Vilensky & Company, LLC

As businesses and individuals begin their tax preparations, it is imperative to address some of the legal aspects of taxes, one of the most serious of which is tax evasion.

Nobody finds paying taxes fun, and some are so opposed to the idea that they choose to avoid paying altogether. You can avoid taxes in two ways: tax avoidance and tax evasion. But the difference is that one is legal while the other is not.

Tax avoidance is a way of reducing taxes by taking advantage of tax shelters and deductions, all of which are completely legal. Tax evasion is the act of not paying taxes by not reporting income, not paying taxes owed, or reporting expenses that aren’t legally allowed.

Unfortunately, people often commit tax evasion without realizing it or understanding the seriousness of the offense because tax evasion is often misunderstood. To help you steer clear of these misconceptions, Vilensky & Company, LLC has debunked three of the most widely believed myths about tax evasion.

Myth1: “If I don’t file, they won’t know”
This myth exists because taxpayers are not informed about the changing environment the IRS uses to obtain taxpayer records.

I would tell my clients that the IRS already knows if they are required to file. Since the IRS already knows, they will eventually come after them. The IRS is one of the most powerful collection agencies in our arena. The IRS receives tax returns that have been reported to them. This information tells the IRS what happened during the year for any particular taxpayer. If there is no information returned on file, the IRS can use their powerful data search tools to find info that is posted to the world wide web by the taxpayer. They can also summon records from third parties. The IRS will find you if the taxpayer has an SSN or TIN.

Myth 2: “I always have a loss; I don’t need to file”
If a taxpayer is engaged in some type of business, whether they construe it to be a for-profit business or just a hobby, then they are required to file a business return. If the taxpayer has a hobby, they must report any income from that hobby. The IRS leverages these rules to ensure taxpayers comply with the filing requirements. If they open a case to come after a taxpayer that has not filed, the IRS typically has information on how to proceed. This results in the taxpayer losing. Even if the taxpayer proves that they are engaged in a hobby, they have to claim the full amount of income received. Sure, the taxpayer can take expenses associated with a hobby but only as an itemized deduction which is limited.

If the taxpayer thinks they can get around those rules, they need to go back to the drawing board and rethink it. Most states do not require you to file any kind of documents to establish a business. The most basic type of business is the sole proprietorship. The taxpayer does not have to file anything to establish this. The IRS has some rules that qualify or disqualify any particular activity as a business or hobby. Once the IRS proves that the taxpayer was engaged in a business or hobby, the burden of proof shifts to the taxpayer to disprove this. While this sounds like an easy task, remember that you are now working with legal terms which require some work to show why that particular rule does not apply.

Myth 3: “I’ll just use cash; hard to track”
Using cash in your business to avoid or evade paying taxes will only put you on the IRS radar. The IRS has specific rules and audit techniques that they use to track down cash businesses. Although many taxpayers have avoided the IRS for years in the past, those days are coming to a close. A case where a taxpayer would be liable to pay taxes but evades or neglects to do so because they think using cash will keep them from getting caught will only land them in jail. A case can go criminal real quick when the IRS involves its criminal division. It is no longer true that the IRS will not prosecute a criminal case because it is too small. They will, and they have for the simple reason of making them an example to ensure compliance. You don’t want the IRS criminal division on your trail.

The IRS can use estimates based on industry data. Remember, the IRS has the largest data available. Furthermore, they can use third-party information. Title 26 USC §7602 authorizes the Secretary of the Treasury or his delegate to examine books and records. The IRS will put together an estimate of what the taxpayer should have made and paid in taxes and stick them with the bill. Once that occurs, the burden of proof shifts to the taxpayer. The “records do not exist” argument will not apply. That will only lead taxpayers closer to prosecution rather than get them out of trouble.

If you’re looking to steer clear of these myths, reach out to Vilensky & Company, LLC, Idaho’s individual or small business tax accountant and bookkeeper. I offer diverse services to those seeking financial and tax help with their small to midsize business or personal finances and tax needs. My services are available to clients across Lewiston, Peck, Lenore, Moscow, Kendrick, Troy, Potlatch, Kamiah, Nezperce, Kooskia, Grangeville, Stites, Ferdinand, Greencreek, Cottonwood, Weippe, Orofino, Winchester, Coeur d’Alene, Spalding, Idaho, Spokane, Clarkston, Asotin, Pullman, Washington, and the surrounding areas.

For a complete list of my services, please click here. If you have questions about tax accounting, I’d love to hear from you, please contact me here.