California Tax Evasion Laws

tax evasion fraud

Any person, legal entity or even government cannot be insured from becoming a victim of fraud crimes. To save money, time and to avoid fraud offences one must know the warning signs of it.

In today’s complex economy, every person has rights and duties set forth by Constitution and laws. In order to help you avoid tax fraud accusations in future we provide you an article with overview of tax evasion and examples of ways people evade taxes. Taxpayers have to file a tax return and to pay the correct amount by a legal duty. Individuals and corporations who do not obey this rule by falsifying or withholding information constitute tax fraud. Below, The Margarian Law Firm will introduce you the main elements of the Tax Fraud (also known as tax evasion) Law.


1. Legal Definition of Tax Fraud in California
2. Tax Evasion
a) Calculation of Taxes
b) What is Income Tax Fraud?
c) IRS Criminal Investigation into Tax Fraud
d) Avoidance vs. Fraud
3. Common Schemes of California Tax Fraud
a) Employment Tax Evasion Schemes
4. Punishment of Tax Fraud
a) Attempt to evade or defeat paying taxes
b) Fraud and false statements
c) Willful failure to file a return, supply information, or pay tax at the time or times required by law.
5. Related Articles

In addition, we are ready to provide answers to your initial questions concerning fraud charges in California for free.

You may file your request online, by telephone or by mail. 818-553-1000


1. Legal Definition of Tax Fraud in California

If a person or legal entity consciously underpays its taxes it considers as tax evasion. Tax amounts are regulated by the Internal Revenue Code (IRS) which is complicated and if a non-professional taxpayer may make some mistakes that can result in underpaying taxes. In this case, the act is not considered as tax evasion. BUT if it is proven that taxpayer deliberately tried to underpay taxes, he, she or it would be convicted of tax fraud.

As it is easy to underreport cash income, restaurant and clothing storeowners, car dealers, salespeople, doctors, lawyers, accountants, and hairdressers were ranked as the top offenders in a government study of income tax fraud.


2. Tax Evasion

Tax fraud occurs when an individual or business entity willfully and intentionally falsifies information on a tax return in order to limit the amount of tax liability.

a) Calculation of Taxes
Americans must file a report about their financial status, their expenses and families. The IRS then calculates each family’s total income and deducts certain expenses, called “deductions,” in order to define their adjusted gross income (AGI). The service then uses a chart to determine what percentage of adjusted gross income to tax, and represents the amount of taxes that should have been paid.

The legislator stated some special circumstances that allow to reduce fewer taxes, which must be verified by IRS.
ex.: available credits for

  • homeowners who have the intent to make substantial improvements to their homes energy efficient
  • businesses if they hire people with criminal backgrounds.

Congress often uses these credits as motivation of changing the way of living.
One of the most common forms of tax evasion is underreporting income. Businesses sometimes enhance their expenses, and families occasionally exaggerate the size of the household in order to take larger deductions. Finally, people take advantage of the current credit system by falsifying their circumstances. If the IRS suspects you of any of these activities, it will initiate an investigation and may accuse you for tax fraud.

b) What is Income Tax Fraud?
Income tax fraud is the willful attempt to evade tax law or defraud the IRS. Tax fraud occurs when a person or a company does any of the following:

  • Intentionally fails to file an income tax return
  • Willfully fails to pay taxes
  • Intentionally fails to report all income received
  • Makes fraudulent or false claims
  • Prepares and files a false return.

Tax auditors look for common types of suspicious and fraudulent activity, such as:

  • Overstatement of deductions and exemptions
  • Falsification of documents
  • Concealment or transfer of income
  • Keeping two sets of financial ledgers
  • Falsifying personal expenses as business expenses
  • Using a false Social Security number Claiming an exemption for a nonexistent dependent, such as a child
  • Willfully underreporting income.

c) IRS Criminal Investigation into Tax Fraud
The IRS Criminal Investigation (CI) conducts investigations into alleged violations of the tax code through the IRS CI law enforcement branch of the agency. CI agents investigate tax crimes, money laundering, and Bank Secrecy Act violations. Investigators use sophisticated methods to uncover computer information protected by encryption, passwords, and other barriers.

d) Avoidance vs. Fraud
According to the Internal Revenue Manual, it is not criminal to reduce, avoid, or minimize personal income taxes by legitimate means. In other words, avoidance is acceptable, but evasion is not.

When you avoid taxes, you do not conceal, misrepresent, or make things appear as they aren’t. Making a mistake is not criminal either. It all boils down to whether you intentionally do something fraudulent. If the IRS determines that your behavior was criminal, you may find yourself paying a fine or, in the worst case, spending time in jail. If you are being investigated for a tax crime by the IRS, it is very important to retain an attorney who is familiar with both tax and criminal matters.


3. Common Schemes of California Tax Fraud

The United States tax system is based on taxpayers, that`s why the IRS does what it can to encourage non-filers to voluntarily rise after a period of not paying taxes. This strategy includes taking a voluntary disclosure into consideration when determining whether to criminally prosecute, negotiating payment installment plans, and reducing tax liability for indigent individuals.

Keep in mind the following information:

  • Knowing failure to file a return can be a criminal violation of the law.
  • It is not the policy of the IRS to prosecute ordinary people who make simple mistakes or whose returns were lost in the mail.
  • The IRS, although it reserves the right to do so, will probably not recommend prosecution for failing to pay your taxes so long as you voluntarily come forward before they contact you and arrange to pay what you owe.
  • If you cooperate, likely you will not be prosecuted.
  • If you derive income from illegal sources, it is more likely that the IRS will insist on prosecution.
  • The IRS’s general policy is non-enforcement of the filing of returns older than six years.
  • You may be able to negotiate a settlement with the IRS, depending on your ability to pay, that will significantly diminish your overall tax debt.
  • The IRS may accept reasonable estimates of charitable contributions, medical expenses, and other deductions.

If you go to a tax professional, you will probably not have to deal directly with the IRS. A tax professional should be able to obtain your past W-2s, 1099s, and 1098s from the IRS if you no longer have them.

Below, you can find a list that gives a number of common examples of taxpayer behavior that the IRS considers intentionally fraudulent and criminal (but it is not limited to):

  • Deliberately underreporting income.
  • Taking payments in cash and failing to deposit them in order to avoid tax consequences.
  • Inflating the value of business expenses.
  • Creating false business expenses for tax purposes.
  • Using a false social security number.
  • Keeping two sets of financial records for your business.
  • Claiming an exemption for a spouse when you are single.
  • Claiming an exemption for a dependent whom you never supported.
  • Destroying your books to conceal tax evasion.
  • Creating false checks or receipts to support deductions that don’t exist.
  • Denying that deposits in your accounts are income when they are.
  • Concealing financial accounts from the IRS.
  • Transferring assets to conceal them from the IRS.
  • Reporting personal expenses as business expenses.
  • Claiming more charitable deductions than were made.
  • Failing to file returns even if you make a substantial amount of income.
  • Making false statements to the IRS under oath.
  • Failing to file returns despite having been contacted in prior years by the IRS for failing to file.

a) Employment Tax Evasion Schemes

One of the most common forms of tax evasion is the employment tax fraud schemes. It can obtain a variety of forms. The most prevalent of them are:

  • pyramiding,
  • employee leasing,
  • payment in cash,
  • failing to fill true payroll tax returns
  • failing to file payroll tax returns.

“Pyramiding” of employment taxes is a practice where a business repudiates taxes from its employees but willingly fails to assign them to the IRS. Businesses implicated in pyramiding frequently apply for bankruptcy, start a new business under a different name and begin a new scheme.

Employment Leasing
Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay taxes to the IRS. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid.

Paying Employees in Cash
Paying employees in cash is a method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.

Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns
Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.


5. Penalties for Tax Evasion
A taxpayer who willfully evades paying taxes can be subjected to civil and criminal penalties. Depending on whether the offender is an individual or a corporation and in which way the crime has been committed, the convicted can face the following penalties:

a) Attempt to evade or defeat paying taxes
Any person who willfully attempts in any manner to evade or defeat any tax imposed by law is guilty of a felony and, upon conviction, will be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution(26 USC 7201)..
b) Fraud and false statements
Upon conviction, the taxpayer is guilty of a felony and can be subject to imprisonment for no more than three (3) years, or a fine of not more than $250,000 for individuals and $500,000 for corporations, or both penalties, plus the cost of prosecution (26 USC 7206(1)).
c) Willful failure to file a return, supply information, or pay tax at the time or times required by law.
Any person required under to pay any estimated tax or tax, or required to make a return, keep any records, or supply any information, and who willfully fails to accomplish required actions, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction, he or she will be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. (26 USC 7203).


6. Related Articles

In the resources of our site you can find more detailed information about different kind of financial crimes and fraud in California.

Fraud Offense

California Theft Crimes

Identity Theft

Dealer Fraud

Insurance Fraud

Mail Fraud

Credit Fraud

Security Fraud

Telemarketing Fraud

Wire Fraud

Mortgage Fraud


We are a client-centered professional law firm. When The  Margarian law firm accepts your California fraud case, you can put your mind at ease. We handle every aspect of your case. Do not hesitate to contact us!
Depending on how complicated your situation and how good your record keeping is, the entire process of clearing up your non-filing status could take as little as a few weeks.

You may file your request online, by telephone or by mail. 818-553-1000

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