Understanding Tax Evasion
Tax evasion is something that we should never get entangled within our lives or business. Tax evasion is illegal. It means using deceptive means to avoid paying taxes. When you are involved in tax evasion, it is not done by accident. A person or business attempting to avoid paying taxes willfully and intentionally looks for strategies to misrepresent their income to the Internal Revenue Service. We need to know about tax invasion.
So, what does tax evasion really mean? The Internal Revenue Service takes tax evasion very seriously. Our U.S. income tax system is based on voluntary compliance. This means it is the taxpayer’s responsibility to report all income. If you do not tell the IRS about the income you are receiving, you are participating in tax evasion. If you willfully underpay your tax liability, you are also participating in tax evasion.
The IRS does not see the ignorance of the laws as an excuse for not following the law. In this post, I will discuss some of the essential aspects of not engaging in tax evasion.
What is Tax Evasion?
For you to participate in tax evasion, the failure to pay your taxes must be viewed as intentional. You do not have to file tax forms for the IRS to determine if you are participating in tax evasion. IRS can base what you owe on information received from third parties like W-2s or 1099s.
Tax evasion can look like someone not reporting income received through illegal gambling or selling stolen merchandise. Or it can look like not reporting tips through legal activities like side-businesses or any other money-making activity. This is also known as the underground economy.
Penalties of Tax Evasion
If you fail to pay your taxes, you risk getting assigned penalties and back taxes by the government at a minimum. You also can receive jail time for tax evasion. If you willfully fail to pay taxes, it is a federal offense.
Incarceration penalties are no more than five years. Fines are no more than $250,000 for individuals and $500,000 for businesses.
You may be responsible for both jail times and penalties, along with the costs of prosecution.
Tax evasion is a severe matter that you should be very careful not to participate in. In this article, I will discuss the legal side and penalties around tax evasion. I will also talk about the difference between tax evasion and tax avoidance.
Finally, I will discuss knowing when to get help and who you should reach out to if you need help with potential tax evasion or if you would like tax avoidance strategies. You do not have to deal with tax evasion as an individual or business. There are things you can know to help you run your personal and business finances well.
Tax Evasion Requirements
For the Internal Revenue Service to determine if your failure to pay or your underpayment of taxes is intentional, that will look at several factors.
The IRA will examine your financial status. They will look for the reason behind your inability to pay taxes.
They will attempt to determine if your nonpayment is due to committing fraud or hiding income that should be reported.
The IRS may judge activities as fraud if you intentionally try to receive payments that do not have a “paper trail”.
For example, this could mean that you accept cash payments without reporting them to the IRS. If you have a business and undervalue your receipts or revenue, this is seen as purposeful tax evasion by the law. The IRS considers these sources of income, revenue, and profits as documented income.
Tax Evasion or Tax Avoidance
There is a difference between tax evasion and tax avoidance. Tax evasion, as we have discussed, is illegal. In comparison, tax avoidance entails finding legal ways to reduce your taxpayer obligations.
Tax avoidance strategies can include charitable giving to recognized charitable organizations by the government. Or you could give to a tax-deferred vehicle such as an individual retirement account (IRA) or employer-sponsored retirement plan.
Other tax avoidance strategies include utilizing the child-tax credit, mortgage deductions, using the standard tax deduction instead of itemizing your deductions, investing in municipal bonds, or holding your investments for a year or more to be eligible for long-term capital gains tax benefits.
How to Avoid Jail Time for Tax Evasion
Unfortunately, a consequence of tax evasion can be prison time. However, the IRS’s goal is not to put taxpayers into prison for tax evasion. It is an infrequent occurrence.
Prison time is often only reserved for the most serious of cases. Tax evasion cases most likely begin with those taxpayers who report in error income, credits, and deductions on tax returns or those that do not file a required tax return.
These cases are not typically filed because a person does not have the finances to pay their taxes. Tax evasion cases will begin with an audit of a particular tax return(s). The IRS will seek to examine the errors found in your tax return. They will determine if the errors indicate a pattern and if the mistakes were intentional. They will be specifically looking for unreported income such as income from gig work, sale of a business, or leaving out entire sources of revenue.
Another thing an IRS audit will examine is if you exhibit fraudulent behaviors in person. This includes making false statements to hide records such as bank accounts from the IRS auditor. It is best to handle your taxes with care and not travel down this road in the first place. It is not worth it in the long run. Being truthful will help you to avoid tax penalties and, in the worse case, imprisonment.
How Do I Handle a Tax Audit for Tax Evasion?
One of the first steps of the IRS in determining tax evasion is to schedule a tax audit. You should not be fearful of a tax audit. However, it is vital to be truthful with the IRS auditor. They are trained and skilled to identify possible tax evasion.
Most IRS audits are done via mail. An in-person audit is extremely rare. They can also be done in the IRS office. In the audit, they will ask for your documents that explain the position of your tax returns.
It is critical that you answer all of the questions that the IRS asks you truthfully.
If your audit is at the IRS office or your home, you must prepare to answer for the entire year represented on your tax return. In situations like this, it is best to have a tax professional representing you and your case.
After your audit, the IRS will give you the next steps to adjust your tax returns, or no changes will be suggested. You will get a report/letter and have 30 days to appeal if you disagree.
Who Can Help Me Avoid Tax Evasion?
The IRS has a lot of assistance via its website and helpline. You can call in or search their website for answers to the questions you may have. You can also invest in a great licensed tax professional such as a Certified Public Accountant (CPA) or tax resolution lawyer to help avoid tax evasion.
A tax attorney will help you look at your current financial situation and determine where tax liabilities exist. They will help you utilize tax avoidance strategies to assist you when filing your personal or business taxes.
What can I do if my spouse is evading taxes? Unfortunately, the IRS can go after you if your spouse is not paying their taxes, does not declare income, or does not pay taxes for several years if you were married and filing jointly. The IRS can go after you for the unpaid taxes.
However, the IRS will look at each situation independently. If you can prove that you had no knowledge of the debt or received a benefit from any refunds given, the IRS may not hold you responsible with your spouse. You can also apply for Innocent Spouse Relief or, if separated, Separation of Liability Relief for tax forgiveness or assume only partial liability.
What is the statute of limitations for tax evasion? The statute of limitations is the amount of time the prosecutor or plaintiff has to file charges against you in a case. Generally, the IRS has three years to audit your tax returns. The statute of limitation for tax evasion is six years for criminal charges of tax evasion. It is six years from the last overt act of tax evasion until the time charges are filed against you. There is no time limit for civil tax fraud.
What are other types of tax fraud? There are different types of tax fraud that can be committed against the IRS. This includes falsifying documents, falsifying a social security card, and making false and fraudulent claims to the IRS. Other tax fraud crimes include employment and payroll tax fraud, refund fraud, and identity theft. Taxpayers can also be guilty of other tax schemes, such as not filing regulatory reports with their foreign accounts.