The former Chelsea and Everton boss is accused of failing to pay 1m euros (£830,000) in tax on his Real salary during his first spell in charge from 2013 to 2015.
Ancelotti began his second stint at Real in 2021.
Prosecutors are seeking a prison term of four years nine months and a fine of 3.2m euros (£2.7m).
The Italian is accused of paying tax only on his Real salary and omitting income from image rights on his tax returns.
“For me, everything was in order,” Ancelotti told the Provincial Court of Madrid.
Ancelotti said he was offered a net salary of 6m euros (£5.1m) by Real and that he left the structure of it to his financial advisors.
“I thought it was quite normal because at that time all the players and the previous coach had [done the same],” he said.
“For coaches [image rights] don’t mean the same as they do for players because they don’t sell shirts.”
Several high-profile figures in Spanish football have been charged with tax evasion in recent years.
Barcelona forward Lionel Messi was fined 252,000 euros in 2017 after initially being given a 21-month prison sentence.
In 2019 Real striker Cristiano Ronaldo accepted an 18.8m euro fine following an out-of-court settlement and Jose Mourinho was fined 2.2m euros relating to tax charges during his time as Real manager from 2011-12.
