Taxes can be difficult to understand and manage, and they are made even more confusing with the very fine line between tax avoidance vs. evasion.
There is a fine albeit significant line between tax avoidance and tax evasion – one allows you to save hundreds, if not thousands of dollars a year on taxes, while the other can land you in a jail cell.
Understanding the difference – and recognizing tax wrongdoing – is important for the education and safety of every American taxpayer. We all know that the IRS doesn’t joke around, and regardless of whether you’re faced with a litigious agent or hefty IRS penalties, getting on the bad side off the IRS is always an exceedingly bad idea.
What is Tax Avoidance?
Tax avoidance describes utilizing everything at your disposal as per the US and state tax code to minimize your tax burden and maximize your after-tax wealth. Tax avoidance is not illegal. This may include the use of loopholes, from simple ones to much more complicated ones, to reduce or eliminate taxes on certain gains and transactions.
Tax loopholes are not always mistakes or oversights left behind in the creation of tax law – sometimes, these loopholes are deliberately created to incentivize certain businesses and financial activities. In this case, “loophole” is a misnomer. These kinds of deliberate tax avoidance features are tax shields. There are ways for both businesses and individuals to reduce their tax burden without crossing the line into illegality.
What is Tax Evasion?
Tax evasion describes any means through which a taxpayer deliberately underpays or misrepresents their tax burden, to underpay. Therefore, tax evasion is illegal. Tax evasion schemes may include:
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- Not reporting certain sources of income to the proper tax authorities (such as being paid under the table for weekend jobs)
- Misreporting personal and business expenses in order to write off more taxes
- Keeping business and personal transactions “off the books” deliberately
- Squirreling funds away in offshore accounts illegally
The main difference between a form of tax evasion vs avoidance is whether the action taken to reduce one’s tax burden is illegal. Any form of tax evasion tends to be explicitly illegal according to the tax code. Tax avoidance schemes make use of loopholes or deliberate lawmaker decisions to reduce one’s tax burden.
The intended end result – to pay less taxes – is always the same. What isn’t the same is how the IRS reacts, and what penalties you end up facing as a result of illegal tax activity.
When Is It Legal – Or Illegal?
Tax laws exist to help taxpayers differentiate between illegal and legal forms of reducing your tax burden. Furthermore, tax professionals serve clients by helping them differentiate between the illegal and legal, advise them on tax avoidance strategies, and help them avoid potential forms of tax evasion.
If you aren’t in the mood to get caught up with state tax problems, then working with local tax professionals is your best bet for finding useful tax avoidance tips without steering into illegal territory. Not all states share the same tax laws, and state taxes and federal taxes are levied under different rules and circumstances.
When it comes to federal tax law, the IRS goes through great lengths to educate taxpayers on how they can best prepare their tax returns. This includes the selection and qualification of select deductions. You can also work with a professional and qualified tax return preparer. The IRS encourages the use of qualified tax return preparers, and helps taxpayers stay away from potential scammers.
In other words, whether or not a specific form of tax avoidance is legal or illegal is not a question you should have to ask yourself. It’s a question you should be asking a qualified tax professional.
Common Examples of Tax Evasion
Tax evasion can come in many shapes and sizes. The most common forms of tax evasion include:
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- Underreporting income.
- Not reporting certain transactions.
- Not reporting the sale of cryptocurrencies.
- Ignoring your overseas rental income and other sources of income.
- Not reporting income from all-cash business.
- Paying for services under the table.
- Deliberately not filing a tax return.
- Failure to withhold tax payments.
- And more.
If you’re concerned about whether any of your tax habits might translate into tax evasion in the eyes of the IRS, contact a tax professional today.
Common Tax Loopholes and Tax Shields
Useful tax loopholes and tax shields include:
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- Tax deductions.
- Employee retirement plans.
- Tax deferral plans.
- Legitimate tax credits.
You may qualify for certain deductibles and credits, and not know it. Some deductibles are accessible to people with tuition costs, medical expenses, daycare costs, and more. Donating to charity also helps.
Penalties for Tax Evasion
The legal consequences for intentional tax evasion are severe. There are prison sentences and hefty fines. Tax evasion is a federal offense. Depending on where a person’s tax evasion crime lands in the set categories, they may face a prison sentence of anywhere from one to five years. Fines for tax evasion range from $100,000 per year, to a one-time payment of $250,000 depending on the crime.
Tax fraud and tax evasion are serious crimes. If you have found yourself charged with tax fraud, it’s critical that you seek out an experienced local criminal defense attorney.
On the other hand, if you’re facing a potential IRS audit and have not committed any form of tax fraud or tax evasion, however, you won’t need the help of a criminal defense attorney. In these cases, speak with a tax professional. The IRS can audit taxpayers randomly or because of basic mistakes and discrepancies. During an audit, it is unlikely to levy criminal charges unless the IRS finds evidence that you deliberately avoided your duty as a taxpayer.
Need Help with Your Taxes?
There is a difference between tax evasion vs avoidance. Trying to pay the government less than you owe is illegal. However, doing everything you can to reduce your tax burden is encouraged. If you want to find out how you might be able to reduce your tax burden both in life and in death, be sure to speak with our tax professionals at Rush Tax Resolution.
We can help through tax preparation services, tax consulting, and when you go toe-to-toe with the IRS, we offer legal representation to ensure that the IRS is treating you fairly as in accordance with the Taxpayer Bill of Rights. Contact us today for more information.