Let’s face it—the word “taxes” alone can be a major stress inducer for most people. A main reason for this is the underlying fear of making a mistake that could lead to an IRS audit, potentially resulting in hefty fines, penalties, or even a jail sentence. In the past three years, there have been more than 5,000 investigations of tax crimes in the United States. In 2019, investigations led to nearly 850 jail sentences.
But how does one become a target of the IRS? First, we need to explore the differences between tax evasion and tax avoidance. Although these terms are often used interchangeably, they are starkly different concepts that carry different legal implications.
What is it?
Tax evasion is the act of using illegal means in order to deliberately avoid paying taxes. This typically includes the willful attempt of hiding or falsifying income. Common examples of tax evasion include:
In a general sense, the IRS does not go after those who cannot pay their taxes due to a lack of funds. Additionally, the IRS is highly skilled to determine if a tax misrepresentation was simply a mistake or due to purposeful evasion. After all, they know as well as anyone the intricate laws, complicated math, and risk of human error that go hand-in-hand with filing taxes. Rest easy knowing that honest mistakes or even negligence does not constitute tax evasion.
The legal trouble can begin when there is a deliberate act of deceit to reduce the amount of taxes you owe. To determine what is considered “willful,” the IRS typically looks for substantial discrepancies over the course of several years to demonstrate a repeated pattern of behavior.
However, it is important to always remain diligent to avoid potentially making a large, long-term mistake without even realizing it. A good example of this is not reporting income from a side business. Failure to do so (for instance, not reporting cash transactions from a side gig) has gotten many independent contractors into hot water with the IRS.
Willfully failing to pay taxes is a federal offense under the IRS tax code. Citizens who are caught for tax evasion are typically subject to criminal charges, substantial fines, and even prison time. Depending on the act committed, the legal risks include:
Tax avoidance, on the other hand, is perfectly legal. Tax avoidance is the act of minimizing the amount of what is owed by using loopholes that exist within the code. Common examples of tax avoidance include:
Who’s at risk?
As we mentioned, employing acts of tax avoidance is legal. However, there are certain strategies that can become risky and lead to potential consequences if not executed carefully.
For example, a tax loophole falls under the umbrella of tax avoidance. A tax loophole is a provision under the current law that allows taxpayers to reduce their liability. Because the tax code is so complex, tax loopholes inherently exist as it is virtually impossible to detail every possible scenario. Instead, taxpayers find savvy ways to take advantage of lower taxes without breaking the law.
Additionally, another strategy that falls under tax avoidance is tax shields. A tax shield is the reduction in taxable income by claiming allowable deductions. Deductions could include charitable donations, medical expenses, mortgage interest, depreciation, and more.
While tax avoidance, tax loopholes, and tax shields are all legal, the more complex you make your approach the more risk you add. If you are considering utilizing a tax loophole, for example, it is important that you consult with a tax professional for expert advice. Failure to do so could result in crossing the fine line from tax avoidance to tax evasion, which carries the legal risks detailed above.
Because tax fraud can result in life-altering consequences such as heavy fines and imprisonment, it is not a situation that should be taken lightly. As we’ve learned, if you have completed your tax returns in good faith, it is not likely you will be a target of an IRS audit. However, if you do find yourself under audit by the IRS or (worse) charged with a tax fraud crime, it is imperative to contact a skilled criminal defense attorney immediately.
An effective attorney will understand the complex tax and criminal laws to provide sound legal advice throughout the entire process. With decades of combined experience and national recognition in criminal defense, the lawyers at Wampler & Passanise have the knowledge to provide expert counsel. For more information, click here or call [nap_phone id=”LOCAL-CT-NUMBER-2″].
For personalized legal guidance, call our office at 417-882-9300 or submit this form to schedule a meeting with an attorney.