What is Tax Evasion and How you Can Avoid It

Everyone agrees that taxes are a pain, but the reality is, we all want to enjoy maximum tax relief and pay as few taxes as possible. Some people evade this responsibility, which leads to the problem of tax evasion. Understanding tax evasion is essential because you can commit tax fraud and incur an immense loss.

What Is Tax Evasion?

Tax evasion is a criminal act where a person deliberately fails to pay their tax liability. It is a federal offense it is punished with jail sentences and hefty fines.

  • IRS tax rules, define the punishment for false statements as follows.
  • The jail time can extend to a maximum of 3 years.
  • The fine can go up to $250,000 for individual taxpayers, up to $500,000 for corporations.
  • The expenses of the prosecution have to be paid by the guilty party.

What Counts as Tax Evasion

Tax evasion includes both deliberate underpayment and deliberate nonpayment. Taxpayers are guilty of evasion if it’s deemed that they committed the act knowingly. Moreover, several aspects are investigated, the financial situation of accused taxpayers to uncover attempts aimed at concealing reportable income. When a taxpayer tries to hide assets, the intention will be deemed deliberate, and such an act is considered fraudulent.

Examples of Tax Evasion

Certain transactions don’t involve documentation, for cash payment and services. If a taxpayer doesn’t report this to the IRS, then it’ll be considered as an attempt to conceal income. There are the most common examples:

  • Underreporting taxable income
  • Intentionally underpaying taxes
  • Falsifying taxable income
  • Falsely claiming business expenses
  • Claiming tax benefits in tax returns

Claiming you earned $50,000 the previous year, you made $80,000 during the same period is tax evasion.

Tax Avoidance

Tax evasion and tax avoidance are entirely different acts, under tax avoidance, taxpayers pay lower taxes. Also, there are several ways, such as paying charity and contributing to your IRA. Tax avoidance is a tax-deferred investment the taxes are paid after the invested amounts are withdrawn. It is a legal way to reduce your tax liability and you can use legitimate means under the IRS tax rules.

Common Tax Evasion

In common tax evasion, tax preparers falsely report financial information at tax filing season. This tax fraud is significant because half of all individuals rely on tax preparers. So according to the IRS, unethical tax preparers deceive naïve clients what they are eligible for. A client may be eligible for tax credits of $5,000, but a dishonest tax preparer claims they are eligible for $15,000. In tax credits, they give big tax refunds, to negotiate higher fees in return.

Abusive Tax Schemes

Abusive tax schemes involve the creation of foreign trusts to capitalize on financial secrecy laws. Tax evaders hide their financial activities to avoid taxes illegally. These schemes often involve complicated financial transactions by taking advantage of secrecy laws. They aim to hide assets and investor’s tax payments can be illegally avoided.