The first criminal statute of the Internal Revenue Code, 26 USC § 7201, attempt to evade or defeat tax, is deliberately vague. It covers any attempts to avoid paying taxes. This statute applies even if the attempts are made on the behalf of another. And the statute covers any attempt to avoid paying taxes, whether or not they have been assessed. Meaning, the statute covers all income regardless of whether or not the IRS knows of is existence. Therefore, any attempts to conceal income from the IRS can be prosecuted under this law.
Concealing income may temporarily reduce a taxpayer’s bill, but once discovered, a concealment scheme can leave the taxpayer vulnerable to substantial criminal and civil penalties. The IRS has identified a wide variety of entities that can be abused and used to conceal income. They include trusts, offshore accounts and corporations among others. Even cash can be used to conceal income. When used to conceal income, anyone who has played a role in concealing the income can be prosecuted, not just the taxpayer.
But it’s also important to remember that there is nothing inherently illegal about any of these entities. In fact, it’s also completely legal to use manage accounts and ownership in order to minimize your tax burden, if done in the proper manner. Trusts and corporations are both created by state law and federal tax law can provide favorable treatment to someone who uses one of these entities properly. But when used improperly to conceal income, these can create targets for an IRS investigation and prosecution.
The test for determining whether or not any of these entities are being used correctly is not if it reduces someone’s tax burden; there is nothing illegal in seeking the most advantageous way to manage income and assets. But when used to conceal income and mislead the IRS, using one of these entities to improperly reduce one’s tax burden can leave an individual vulnerable to criminal prosecution.
Examples of Concealment Schemes include: