I spent most of my career in the Fortune 500 setting so I had never been exposed to blatant tax evasion. Then I started working with small and mid-size companies and I was horrified.
Let's start by defining the two concepts.
Tax Avoidance is the legal practice of using existing tax laws and regulations to minimize the amount of tax that you owe.
Tax Evasion is a deliberate Illegal practice to avoid or underpay taxes that are legally owed.
This is not the time to start sweating the "personal" expenses that you have run through your company. The trips, cell phones, Disney timeshares, luxury cars, home repairs, payments to family members, above market value compensation rates etc. Almost everyone does that and how to handle those expenses will be fully covered in topic 28.
Now you are probably thinking, if those are not tax evasion then what is?
The other question you might be thinking is that if their tax conduct is that illegal why would they tell me? The answer is selfish greed. Some people want to have their cake and eat it too (lower taxes when not for sale and highest sales price when for sale).
A real-life example or two should provide a great deal of clarity.
First, it should be mentioned that a company values and sells for a multiple of adjusted earnings. Let's assume a sales multiple of 5.
When not for sale an "extra tax expense' of 100,000 will save the owner 30,000 in taxes.
When for sale the "extra tax expense" will cost the owner 500,000 of purchase price. (100,000 x 5).
Suddenly the end of year advice your CPA gave you to come up with some extra expenses "or pay it out in taxes" does not look so good, does it?
Two real life examples
Car Repair Company – the owner figured out how to remove repair orders from his system so he did not report any of those repair revenues but left all of the cost of labor and parts in his financials. He was so blatant he even kept the sales taxes he collected. He had the audacity to want to adjust those dollars back in during the sales process because it was going to cost him 1,500,000 of purchase price.
Towing Company – they did 600,000 in "cash transactions" and if they were not adjusted back in it would cost them 3,000,000 of purchase price. The other thing that drives these illicit owner's crazy is that they know the new owner will receive all of that incremental non-reported cash business without paying for it in the purchase price.
Buyers are very familiar with and comfortable with many forms of personal expenses that are run through private businesses. The is an entire formalized process (topic 38) that addresses the right way to navigate (adjust out) expenses such as those.
HOWEVER, buyers want no part of companies committing blatant tax evasion. They correctly reason that if an owner would deceive the federal government, then what other illicit or illegal things have they done and would they deceive me?
NO reputable M&A advisor will engage a company that conducts themselves in this illicit manner.