Nobody likes paying tax. However, it is one of your core obligations as a resident of California, and there are significant penalties for not doing so. It is worth knowing what constitutes tax evasion, as opposed to tax minimization, and what the penalties are for failing to pay the appropriate amount of tax.
A Simple Introduction to Tax Evasion
Tax evasion occurs where a taxpayer (either an individual or a company) “intentionally pays less than they owe” to any state or federal tax agency. It is judicially determined, which means that if you are accused of tax evasion you will have to go to court. This is a criminal case, and if you find yourself in this situation, you will want to have an experienced tax lawyer on your side to guide you through the process.
Avoidance vs Evasion
There is a difference between tax evasion, which is illegal, and tax avoidance, which is not. It is best to think of tax arrangements as existing on a spectrum, rather than falling clearly on one side of a bright line. Taking advantage of beneficial tax policies to minimize your liability (for example, through utilizing valid deductions) is tax minimization. Tax avoidance, whilst more aggressive in its approach, is along the same lines, and is still legal. Companies have more avenues available to them for tax avoidance arrangements than individuals, but the underlying test is the same and looks at the “dominant purpose” of an activity which has as an effect the minimization of tax.
For an activity to count as tax evasion, as opposed to avoidance, the prosecution must prove that you wilfully did one of the following:
- Did not report all of the income you or your company earned
- Did not file a tax return
- Made false statements on your tax return, or
- Falsely claimed to be a resident of another state.
If you illegally fail to pay tax or pay too little tax, you may be subject to prosecution for tax evasion.
3 Main Tax Agencies
The main tax agency in California is the Franchise Tax Board. However, people can evade taxes from any of the 3 main tax agencies in California. Each collects, and therefore enforces fraud in relation to, a different type of tax.
- The Franchise Tax Board collects income tax. Its investigation arm handles all reports of income tax fraud.
- The Board of Equalization collects sales and use taxes. Reported corporate use or sales tax fraud would be handled by this agency.
- The Employment Development Department distributes employment benefits, including disability and unemployment payments. It investigates reports that an employer is not paying taxes that fund these benefits and also reports that a benefit recipient is not reporting or paying taxes on those benefits.
If any of these agencies determine that tax fraud has occurred, the case is passed to the state attorney’s office to prosecute.
Consequences and Penalties
Tax evasion is taken extremely seriously and the penalties for convicted offenders can be significant.
AuditIf you are suspected of tax evasion, the first step will be an audit of your taxes. If you lie to or deliberately mislead the auditor, it will be taken as intent to evade taxes.
FinesIf you are convicted of tax evasion, you can be ordered to pay a fine of up to $20,000.
PrisonConviction can also mean that you are sentenced to a year in jail.
The state will also collect the taxes that you owe. The collection process is undertaken by the relevant tax agency and will depend on the nature of the tax that is owed. The agency first sues you as the taxpayer, and will acquire a tax lien on your property from the court as security against payment. If you cannot pay, the agency will obtain a warrant for the property and have a marshal or sheriff seize the property, which is then sold to satisfy the debt.
The state also maintains separate lists of the top 500 delinquent taxpayers, both individual and corporate, which are publically viewable. If you are added to this list, it may affect your future credit rating and professional reputation. You can view this list here.
Unable to Pay
Perhaps you feel that you cannot pay your tax bill, and are therefore tempted to avoid filing a return or to report your income as lower than it is. This is a very dangerous decision which can put you at risk of prosecution. If you are unable to pay your taxes, the state can offer some options to help. You may be able to negotiate an installment agreement and pay back the debt over time. If you do not have the means to pay the liability now or in the foreseeable future, the agency may accept an Offer in Compromise, which is a negotiated lesser sum, representing the amount that the agency can realistically hope to recover from you. If your situation is such that you cannot afford to pay at all, you may need to consider filing for bankruptcy. This will halt any processes in place for recovering the debt, although the liability will often not be discharged and you may need to apply for an installment agreement at the expiration of your bankruptcy.
Irrespective of your financial situation, it is imperative that you file a tax return and report your income honestly.
If you are in any doubt about the legality of your tax return, you should consult with an experienced tax professional. Getting an educated opinion on your tax situation can save you thousands of dollars in penalties, protect your reputation, and give you peace of mind. If you discover that you have made a mistake and filed an incorrect or false return, you should file an amended return as quickly as possible. The fee to do so is far lower than any penalty for tax evasion will be. However, if you did not file an amended return and have been accused of tax evasion, the next step is to hire a California tax attorney to ensure that your rights are protected and to obtain the best possible legal defense for your case.