Tax Evasion Penalty

Tax evasion is illegally avoiding paying taxes, failing to report, or reporting inaccurately. The most common one is failing to report cash income. The government imposes strict and serious penalties for tax evasion.

Tax evasion is different from tax avoidance, which is making use of legal methods to minimize tax due.
There are many deductions you can legally claim to reduce your tax liability, for example if you have dependents (the more dependents, the lower your taxes), if you have certain medical expenses or if you contribute to certain retirement plans or to charitable organizations. Taking advantage of them and keeping your tax bill to a minimum is quite legal and if you do that you are guilty of no crime. However, when companies, individuals, or any other legal entities intentionally avoid their legal responsibility, that is tax evasion and the penalties are severe, including prison terms and hefty fines.

The Internal Revenue Service (IRS) oversees the regulation of taxes. It also prosecutes any person or entity that avoids payment of taxes due, and can assess penalties.

The IRS has nearly 3000 special agents who are trained to gather the information used to detect tax evasion. They have access to tax returns, the power to issue a summons for access to further financial information, and the right to seize or freeze monies in the attempt to collect the necessary financial information.

The IRS audits some taxpayers at random each year, but most audits are a result of unusual activity. If a person claims a lot of deductions in proportion to their income, or if a person with a lot of assets declares a very small income, an audit may result. If it is established that taxes have been intentionally evaded, the IRS can levy tax liens, seize assets, freeze money in check and savings accounts, and garnish wages. Any and all properties held by the individual taxpayer can be seized and sold at auction if no attempt is made to repay the liability.

Everyone that is determined to be involved in an evasion of tax liability has the right to meet with the IRS and be heard. Should you find yourself in this situation, it would be wise to engage a tax attorney.
There are three crimes with which an individual may be charged:

* Tax evasion: This is a felony and a conviction can carry a prison sentence of up to five years and/or fines up to $100,000.

* Filing a false return: The government does not have to prove the taxpayer intended to evade tax laws, just that the taxpayer filed a false return. This is a felony and can result in a prison sentence of up to three years and/or fines up to $100,000.

* Failing to file a tax return: This is a misdemeanor and can result in a maximum prison sentence of one
year and/or fines totaling up to $25,000 for each year for which no return was filed.

Many individual taxpayers rely on accountants and business managers to handle their financial affairs and may not be aware of the status of their finances. However, the individual taxpayer is responsible for the information provided to the IRS. Do yourself a favor and examine your return, understand what you’re reading, and check that it is accurate.

The author believes that filing tax returns should be as simple and painless as possible and that every taxpayer should take advantage of the many ways to legally keep taxes to a minimum. Read more at


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The Nevada Myth: Rethinking the Nevada Corporation

Debunking the myths of Nevada corporations and analysis of pros and cons of forming a corporation.

After you have decided that incorporating is beneficial for your business, some people consider incorporating in states outside of their home state. Most notably, Nevada has been promoted by many “incorporating services” as having incredible benefits as opposed to the client’s home state. Other states such as Delaware and more recently Wyoming have also received consideration for incorporating. In some cases, depending on the facts of your business, there are some benefits in forming an out-of-the-home-state corporation in states such as Nevada. However, in the majority of cases the benefits of forming a Nevada corporation is simply a myth and will often be more expensive and troublesome than filing in the company’s home state.

Law of the Land: Foreign Entities

This may be a surprise to many, typically, corporations will be governed under California law despite being incorporated in Nevada. Let’s assume you do file a Nevada, yet you operate all of your business in California. Under this scenario, you are deemed to be a “pseudo foreign” corporation. If the corporation is a pseudo foreign corporation, California law in many areas will supersede the law of the state where the company was incorporated in. (See California Corporation Code §2115(b)). Therefore, for companies entirely based in California and doing business in California, practically all of the claimed benefits of incorporating in Nevada are out the window. It should be noted that if a Nevada corporation operating in California fails to qualify as foreign corporation, it may be subject to a number of sanctions. (See California Corporation Code §§2203, 2258, 2259).

Nevada v. California

The benefits typically touted by a Nevada corporation are the following: lower costs; tax savings; and greater privacy. But is any of it true? Below we will discuss some of these issues.

Expense: Contrary to what many people believe, it is more expensive to file in Nevada than in California. Here are some of the additional expenses: the initial filing fee is more; the Statement of Information is much more; you will be required to file a Statement and Designation of Foreign Corporation in California; and you will be required to hire a Nevada Agent for Service of Process each year. For large clients, the additional cost (of approximately $500 more) is not a big consideration, but for smaller businesses every dollar counts.

Taxes: The tax ramifications is usually one of the most important reasons for deciding whether to incorporate and where. Nevada’s secretary of state website says that Nevada has none of the following: (1) corporate income tax; (2) taxes on corporate shares; (3) franchise tax; and (4) no personal income tax. So how does this actually play out? The bottom line is if you are doing business anywhere other than Nevada, you will still be required to pay taxes in the state where you are conducting business. So if you are operating and generating business in Nevada, this can be a huge benefit, otherwise if you are generating money in California, you are required to pay California’s taxes. Furthermore, any income earned by a Nevada business and paid out to a resident of another state will be subjected to the taxation of that state. Therefore, the income passed on to the shareholders of an S-Corporation in Nevada will be taxed at both the federal level and in the state where the shareholder lives (this also applies to other pass-through entities such as LLCs).

Thus, as indicated in the paragraph above, you will not be able to legally gain the Nevada tax benefits if you form a Nevada pass-through entity such as a S-corporation or LLC. However, a Nevada C-corporation can avoid the state taxes (remember that a C-corporation is subjected to double taxation at the federal level). The way a Nevada C-corporation operating in California could be structured to minimize its taxes is as follows: As a C-corporation, your company will be stuck with double taxation at the federal level. Rather than withdrawing the profits from the corporation, keeping the profits within the Nevada C-corporation will allow it to grow free of any state taxes.

Limited Liability Protection: Whether your company has greater limited liability protection in Nevada versus other states is debatable. Many believe that Nevada state precedence makes piercing the corporate veil much more difficult. Whether this is true will depend on the facts of your case and how good your lawyer is, since the test for piercing the corporate veil in both states are substantially similar (both California and Nevada require a showing that a substantial injustice or perpetuation of a fraud occurred). However, in regards to directors and officer liability, Nevada law provides that directors and officers are not liable for any damages resulting from a breach of fiduciary duty unless the breach involved intentional misconduct, fraud, or a knowing violation of the law. (See Nevada Rev. Stat. §78.138(7)).

Jurisdiction: This can be good or bad for your company. If you are operating in California but are a Nevada corporation, the question is which state law takes precedence? As indicated above, in most circumstances, your corporation will be deemed a pseudo foreign corporation and thus be subjected to California’s laws. So if you are sued, the lawsuit would likely occur in the California. However, if the plaintiff attempts to pierce the corporate veil, the lawsuit may occur in Nevada, thus the plaintiff would have to face additional expenses to travel to Nevada to try the case. Likewise, you as the defendant would be required to go to Nevada as well. However, if you enter into contracts with others, your contract can include “choice of law jurisdiction” provisions, which require that the contract falls under the laws of Nevada. Similarly, “choice of forum” provisions in your contracts will require your case to be heard in Nevada.

Privacy: Nevada is generally more restrictive than most states in sharing information about its corporations with other states and the government. As such, many celebrities and high profile individuals seeking anonymity often end up incorporating in Nevada. However, both California and Nevada do not require its stockholders to be listed in public records. Further, Nevada does not share information with the IRS unlike California. But if a Nevada corporation conducts business as a pseudo foreign corporation in California, it would be required to disclose the information to the IRS.

This article is not intended as a substitute for legal or tax advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws.

Michael N. Cohen, Esq. is a business and intellectual property attorney and is the principal of the Law Office of Michael N. Cohen, P.C., located in Beverly Hills, California. For more information, go to or contact Mr. Cohen at 310-288-4500.


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FAA IRS don’t regulate in the same Language –

NBAA forum discusses tax implications of aircraft ownership and operationsby Roger A. Mola

“The FAA, and the IRS…they really don’t think alike,” began tax attorney Gary Garofalo, first speaker at the NBAA Federal Aviation Tax Forum in Arlington, Va., on May 7. Some 80 specialists, accountants and financial officers attended the most advanced forum the NBAA tax committee has held on aircraft taxation.

“What I’m talking about is counterintuitive from a legal point of view, but there aren’t a lot of FAA regulations that are so clear,” continued Garofalo. “Your lawyers will tell you to operate as a flight department company to limit your liability, but the FAA says ‘No.’”

Regulators distinguish ownership from oversight, and flight management from financial management. Alan Goldstein, v-p of Citigroup Business Services and chairman of the NBAA tax committee, carved the distinction.

“Something might work from the tax side, but then you’re in trouble with the FAA,” said Goldstein. “With the FAA it’s all about ‘operational control,’ and with the IRS it’s about ‘possession, command and control.’”

A dozen speakers underscored the perils of navigating that gulf, giving practical tips for nearly all U.S. operators except those in Alaska, whose congressional leaders often land a “gravy plane” of tax relief.

Garofalo and Goldstein unmasked an adversary that has appeared on few screens: the Department of Transportation.

“Most flight departments have never heard of the DOT as a regulator of flight operations,” said Garofolo. A business incorporated in the U.S. can nonetheless be labeled a foreign company if only a single executive–its president–is not a U.S. citizen, in which case DOT Part 375 applies. Last July 7, NBAA published an initiative in the Federal Register for relief, and the matter remains open pending comments.

Goldstein pointed to global sourcing: “I can think of four U.S. companies just off the top of my head that have had or now have foreign leadership: Heinz; Ford Motor; Coca-Cola; and Citibank, which I know a little about. It’s odd to think of Ford as a foreign company.” Part 375 can bite even if executives over the president are U.S. citizens.

Garofalo dispelled a popular misconception with regard to aircraft interchange, FAR 91.501(c)(2).

“I emphasize swapping equal time because that’s the essence. A lot of people think with interchanges they can make up the difference in hours for unequal-cost aircraft. That’s a no-no. Interchange is a swapping of hour for hour.” No charge is made except one not to exceed the difference between the cost of owning, operating and maintaining the two airplanes.

“My personal opinion is that demonstration flights are not a lease, but I can’t point you to any FAA authority on that,” said Garofalo in the next section. “You can charge for demo time at the same fully allocated cost as time sharing. Joint-ownership agreements under 91.501(c) (3) are not available to fractional owners,” he cautioned. “The FAA was afraid you’d go below the level of a one-sixteenth share, a critical part of the fractional regulations.”

Alvaro Pascotto is a well known lawyer and author who writes articles on international financing and investment, entertainment, intellectual property, business aircraft transactions, tax planning, and private equity and wealth management. For further details please visit the site


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Tax Benefits of A “C” Corporation – Funding

If you are going to form a corporation, you might be surprised to learn a “C” corporation comes with a lot of tax benefits. While this article isn’t intended to replace the advice of a good tax professional, it may serve to open your eyes to the value of a “C” corporation.

“C” Corporation

The “C” in C corporation has a few legal ramifications, but it is primary a designation for tax purposes. Put in layman’s terms, the designation simply means the corporation will act as its own tax entity. In contrast, an “S” corporation acts as a pass through tax entity, pushing its financials down to the shareholder who report the information on their personal tax returns.

The Internet Revenue Code sets out the law on tax and it contains a few juicy provisions for corporations. Lets take a look at one of the advantages.


When a party transfers something of value to another party, the IRS gets interested. It views the receipt of something of value as a taxable event. In simply terms, if you pay me for forming a corporation, I have to report and pay taxes on the money. Since a C Corporation is a stand alone tax entity, what happens when you purchase stock?

You have made arrangements to form a “C” corporation. Now you have to buy stock in it to become a shareholder. If you exchange money or property for the shares, the IRS takes the position no taxable event occurred. In essence, this means the corporation will not have to report you contribution as part of its revenues. If the money isn’t considered a part of the corporate revenues, no tax must be paid on it.

The exact rules for funding a corporation are a bit more complex. With any tax issue, you can expect there to be roughly fifty exceptions and qualifiers. For instance, if you were to exchange services instead of money for the stock, the above example would not apply. Make sure you speak with a tax professional to handle your particular situation correctly.

In Closing

Many people choose a business entity without considering all relevant aspects. Taxes definitely constitute one of these aspects. Make sure you look into them prior to making your decision.

Richard Chapo is with – providing legal services to San Diego businesses.

Taxes and Bankruptcy

The filing and subsequent discharge of either a Chapter 7 or a Chapter 13 bankruptcy may eliminate some types of personal income tax liability. There are, however, certain restrictions which must be met in order to completely eliminate personal income tax liability through bankruptcy.

Some personal income taxes may be eliminated through the filing and subsequent discharge of a Chapter 7 bankruptcy. The following requirements must be met for the personal income tax liability to be eliminated in a Chapter 7 bankruptcy:

• The tax return must have been filed on time

• The filing should not be fraudulent

• The tax return must have been filed over three years ago as of the bankruptcy filing date (e.g. IRS debts for the last three years generally, would not be dischargeable)

• Alternatively, in some cases, if the tax return was filed late, was not fraudulent and was filed over two years ago as of the date of the bankruptcy filing, the tax debt may be deemed dischargeable. For example, if you filed your 1986 tax returns in 1990, and in 1994 filed a Chapter 7 Bankruptcy, this tax debt would be dischargeable as long as it was not related to a fraudulent filing and the tax debt was assessed by the IRS over 240 days before the bankruptcy filing.

Even if all of the above requirements are met, personal income taxes can still sometimes be non-dischargeable in a Chapter 7 bankruptcy. This occurs when the IRS has placed a tax lien on the debtor’s property. In this case, the tax liability must be paid in full, but the IRS may be forced to accept a payment plan or substantially eliminate penalties through the filing of a Chapter 13 bankruptcy.

In a Chapter 13 bankruptcy, the debtor makes payments to a bankruptcy trustee and the bankruptcy trustee in turn distributes a percentage of the payment to the creditors. A Chapter 13 plan is filed with the court which determines the amount distributed to each creditor by the trustee. A bankruptcy judge can force the IRS to accept extended payments on personal income tax liability through a Chapter 13 plan.

This type of bankruptcy works well when the IRS has a tax lien on personal property and the debtor has enough income to pay back the IRS over a three to five year period. Tax penalties may be discharged in a Chapter 13 bankruptcy because they are lumped in with all the other unsecured creditors of the debtor, such as credit cards. These are generally only paid back through the bankruptcy at 10% or ten cents on the dollar.

Filing either a Chapter 7 or a Chapter 13 bankruptcy may be a useful tool for debtors to eliminate tax liability.

Richard K. Gustafson, II is a partner with Legal Helpers and specializes in consumer bankruptcy law., the law firm of Macey & Aleman, is one of the nation’s largest consumer bankruptcy firms. Founded in 1994, Legal Helpers have helped over 75,000 clients eliminate over $500,000,000.00 in debt. Legal Helpers can be contacted by phone, 888-743-5787 or by email,

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