While nobody wants to be responsible for paying any more taxes than is absolutely necessary, it’s critical to remain aware of the fine line between getting creative with your tax responsibilities in a legal way, and taking it too far into tax evasion or avoidance. The latter should be avoided if you don’t want to land yourself as the subject of a government audit, or even in prison.
In 2019, IRS declared a tax gap of $441 billion, representing the difference between the amount of taxes that should have been collected, and how much was collected.
Despite this significant total of uncollected taxes, the same year, IRS audited only 0.4% of individual taxpayers in 2019, and only 6.2% of corporations.
While there are certain behaviors and triggers that may result in IRS auditing your business, it is clear that they are incapable of fully keeping up with the full amount of audits needed to regulate all taxpayers.
What is tax evasion?
Tax evasion is defined as “the use of illegal means to avoid paying taxes.” Some examples of actions that may be labeled as tax evasion include the following:
- Purposely underpaying your taxes
- Underreporting your annual income
- Claiming false deductions
- Hiding interest
- Falsifying records
What’s the difference between tax evasion and tax avoidance?
While tax evasion is an illegal practice, tax avoidance is the act of legal strategic tax planning. While the actions listed above are unlawful and enlist deceitful and dishonest tactics to avoid paying the funds for which they were responsible, tax avoidance involves simply reworking their options to minimize the total amount that they are responsible for paying.
Some examples may include the use of tax-advantaged savings accounts (such as those for retirement or educational purposes), contributing to charitable organizations, or avoiding realized capital gains.
The point in which tax avoidance transitions to tax evasion is a gray area. Oftentimes the average taxpayer may not be equipped to determine at what point this line is crossed. As such, the best practice is to consult with a tax attorney or tax law professional to ensure that your actions do not lead to potential consequences including those mentioned below.
Potentially penalties for tax evasion
Tax evasion is a criminal offense and has the potential to lead to jail time.
The average jail time for tax evasion ranges between three to five years. It varies on a case-by-case basis, but jail time for tax evasion occurs more often than one would think. What other penalties exist for tax evasion?
According to Internal Revenue Code, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Needless to say, IRS takes tax evasion seriously. With a 90.4% conviction rate on criminal cases, going up against the IRS criminal investigations department is not to be taken lightly.
You may be able to show that there was no intent to defraud the government if you are able to prove that there was a legitimate miscalculation of taxes. With proper guidance, it is possible to partake in tax resolution negotiations with IRS or state tax authorities. It is always advised that you receive counseling from an experienced tax attorney who can help in creating a defensive strategy to bolster your case.
The attorneys at Milikowsky Tax Law have extensive experience in dealing with tax evasion charges. Contact us today with further questions or to discuss your case.