Could Tax Evasion Be Prosecuted as Money Laundering?
The Emerging Legal Threat
Most business owners understand that tax evasion is illegal. But few realize that it could soon carry even steeper consequences, including charges for money laundering.
This isn’t speculation. A growing number of international frameworks and academic studies, including guidance from the Financial Action Task Force (FATF), are pointing to a future where tax evasion could be treated as money laundering.
If your business is facing a government audit, it’s important to understand what a redefinition of money laundering might mean and how to protect yourself.
The Definition of Tax Evasion is Changing
Historically, tax evasion and money laundering were treated as separate crimes:
- Tax evasion meant underpaying taxes by concealing income or inflating deductions.
- Money laundering meant disguising the origin of money earned through criminal activity (like drug trafficking or fraud).
But that line is starting to blur.
Under the FATF’s international standard, tax evasion meets the definition of money laundering:
- Generates criminal proceeds (illegally saved tax money).
- Disguises their origin (usually through false tax filings or complex accounting).
That means one act, like knowingly underreporting income, could check both legal boxes: tax evasion and money laundering.
Could This Affect U.S. Business Owners?
Right now, the U.S. legal system does not automatically treat tax evasion as money laundering. However:
- Many European countries already consider tax evasion as money laundering.
- The FATF’s recommendation is clear: all tax evasion should be prosecutable under money laundering statutes.
- The IRS and DOJ often coordinate tax-related investigations with financial crimes units.
In short: You may not be charged today, but the groundwork is being laid for a new definition of money laundering as it relates to criminal tax evasion. And if a case is elevated from civil audit to criminal investigation, the added weight of money laundering charges could change everything.
Real-World Examples of Hidden Risk
You don’t have to be committing fraud to be at risk. Common red flags that raise audit scrutiny, and could be misinterpreted as laundering activity, include:
- Mixing personal and business funds
- Using multiple entities or shell companies to shift income
- Omitting income from foreign sources or digital payments
- Overstating deductions or expenses tied to real estate or equipment
- Structuring payments to avoid IRS reporting thresholds (also called “smurfing”)
Even if your intent is not criminal, the pattern may lead an auditor or investigator to assume otherwise.
What Business Owners Can Do
- Take Every Audit Seriously
Whether it’s the IRS, EDD, CDTFA, or SBA, any audit has the potential to escalate. Responding with vague or incomplete records can make things worse. - Don’t Try to Explain It Alone
Even if you’re confident that your tax filings were correct, never respond to an audit without guidance. Anything you say can be used to build a broader case. - Retain Legal Representation Early
CPAs are essential for preparing accurate returns. But they do not have attorney-client privilege. When you bring in a tax attorney, your communications are protected, and your defense strategy is insulated from future use against you.
How Milikowsky Tax Law Protects You
We’ve represented hundreds of businesses under audits and investigations, both civil and criminal. Our clients trust us to handle:
- IRS audits
- EDD worker classification audits
- CDTFA sales tax audits
- SBA PPP loan audits
- Customs (CBP) or tariff-related disputes
Don’t Wait Until It’s Too Late
If tax evasion becomes a gateway to money laundering charges, business owners could face higher penalties, more aggressive enforcement, and greater legal risk.
If you’ve received a letter, audit notice, or document request, now is the time to bring in legal protection.
Contact Milikowsky Tax Law to schedule a confidential consultation.
