Every individual with an income has an obligation to pay income taxes. The amount that someone pays will depend on how they earn their income, how much income they earn and their personal circumstances. Factors like homeownership, major medical expenses, charitable donations, retirement savings contributions and large families can alter an individual taxpayer’s responsibilities. Therefore, people need to file annual tax returns so that their personal financial records accurately align with what the Internal Revenue Service (IRS) knows about their situation.
When computing tax liability, people look at everything from their total income stream to the credits and deductions that they can apply. Occasionally, the IRS may recommend the federal prosecution of an individual for tax evasion. The following situations tend to trigger concerns about tax evasion.
Under-reported income or assets
One of the most common red flags for tax evasion is a scenario in which an individual does not report their income in full. Perhaps they failed to report income from investments or side jobs. Maybe they hide and do not disclose assets. Digital assets and offshore financial resources are among commonly unreported assets that could lead to claims of tax evasion. Taxpayers need to fully disclose their personal holdings, including resources held in another country, as well as all significant streams of income.
Inappropriate credits or deductions
Some people will misrepresent their circumstances by claiming they can still take a deduction for a child who is now an adult or by claiming their children after a divorce when they know their spouse will do the same. Other people may try to write off personal expenses as though they are tax deductions. Individuals often assume that stretching the truth by calling personal purchases deductible expenses or claiming credits inappropriately won’t come to light unless they face an audit. However, the IRS does randomly audit tax returns every year and pays close attention to those with questionable deductions or credits on their returns. An audit could easily lead to federal prosecution.
Anyone who intentionally misrepresents their personal or financial circumstances to reduce what they pay could end up facing claims of tax evasion. Mounting a rigorous defense against tax evasion claims usually begins with a careful review of one’s financial records and the allegations the federal government has filed.