Tag Archive for: tax avoidance

What to Know About Tax Evasion and Avoidance

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. 

 

What is the Average Jail Time for Tax Evasion?

The threat of a tax audit is not news to most business owners. While some may be willing to risk the chance of ignoring their tax responsibilities when the outcome is simply fees and financial penalties, that may change when they realize that tax evasion may lead to more than just monetary punishments. It may be news to some that tax evasion is a crime punishable with jail time.  With that in mind, is it still worth the risk?

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. 

Is Tax Evasion A Criminal Or Civil Offense?

IRS has the ability to determine if a case of tax evasion is a criminal or civil offense or both. While criminal penalties have the ability to send you to jail for up to 5 years in addition to a fine of up to $100,000, as stated above, civil tax penalties can hold you responsible for repaying up to 75% of the tax due, plus interest. 

While the actions that lead to both criminal tax penalties and civil tax penalties can be the same, IRS is held to a different standard of proof for each penalty type. In a criminal tax case, the IRS must prove tax fraud “beyond reasonable doubt.” To impose a civil tax fraud penalty, the IRS must only prove tax fraud by “clear and convincing evidence.” This lower standard of proof raises the urgency of having impeccable representation in civil cases as well as criminal. 

Types Of Tax Evasion

IRS identifies two types of tax evasion. They are defined as “the willful attempt to evade or defeat the assessment of a tax”, and “the willful attempt to evade or defeat the payment of a tax.” 

The first represents a taxpayer that files a falsified return either by omitting income or claiming deductions that they are not entitled to. The latter encompasses taxpayers that conceal money or assets that could be used to repay the taxes that they owe. 

Below are a few examples of tax evasion practices:

  • Failure to file returns
  • Understating income/assets
  • Overstating tax deductions
  • Filing of false returns
  • Sales tax fraud
  • Failure to pay employment withholding taxes

What is the Average Jail Time for Tax Evasion?

Tax Evasion vs Tax Avoidance

It should be noted that there is a distinct difference between tax evasion and tax avoidance. Tax avoidance occurs when individuals can lawfully mitigate tax liabilities using methods that have been approved by tax authorities—tax evasion is purely illegal evasion of the tax burden that befalls your company.

FBAR Penalties

If an individual willfully fails to report foreign accounts, IRS can potentially collect the full maximum balance of foreign accounts through a civil penalty. IRS accomplishes this by penalizing the maximum balance by 50% numerous times over a multi-year period. Criminal penalties may also be issued for FBAR penalties. These can result in more than $400,000 and potential jail time—similar to tax evasion.

How To Defend Against Tax Evasion Charges

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 if with further questions or to discuss your case. 

Tax fraud
In the eyes of the federal government, there is a vast difference between a criminal tax fraud offense and a civil fraud offense. These differences focus primarily on the different burdens of proofs, penalties, statues of limitations, and defenses available to the taxpayer. 

For several reasons, often the IRS will first pursue a criminal tax fraud suit before pursuing a civil tax fraud suit. According to the IRS’s own Tax Crimes Handbook, a criminal tax fraud conviction “carries the most severe penalty of the criminal tax offenses.”

Civil tax fraud and criminal tax fraud have different burdens of proof. The IRS carries a “clear and convincing” evidentiary standard for civil tax fraud. (This is otherwise known as a “preponderance of the evidence” standard). By contrast, criminal tax evasion requires proof “beyond a reasonable doubt”—which is a higher evidentiary standard. In other words, the government must prove “more” to show criminal tax fraud than civil fraud.

Civil tax fraud and criminal tax fraud also have different associated penalties. There are several categories of civil tax fraud—for example, there is the fraudulent failure to file a return, accuracy-related penalties under IRC, spousal liability under IRC, and the fraudulent tax return for, e.g., failing to report income on your return and failing to pay tax. Each of these has different associated penalties. For instance, the penalty for fraudulently failing to file a tax return is 15% of the net tax due for each month (up to five months), with a maximum penalty of 75% of the unpaid tax. Similarly, the penalty for filing a fraudulent tax return (e.g. failing to report income) is 75% of the underpayment amount.

The penalties for criminal tax evasion are steeper. Under code 7201, a taxpayer found guilty of willfully attempting to evade tax (or its payment) could face a fine of $100,000 ($500,000 for a corporation) plus five years of imprisonment. Similarly, if a taxpayer is found to have willfully failed to pay tax, file a return, keep sufficient records, etc. he or she may face a penalty of $25,000 ($100,000 for a corporation) plus one year in prison.

Moreover, civil tax fraud and criminal tax fraud have different statute of limitations. For civil tax fraud, there is no statute of limitations, and the tax may be assessed at any time. By contrast, there is a criminal statute of limitations, but it applies only to the prosecution of the crime—the actual tax evasion—not the assessment of the tax owed. Typically, the statute is three years after the taxpayer commits the offense. But there are certain, specified carved out offenses for which a six-year statute of limitations applies.

Finally, different defenses are available for civil tax fraud and criminal tax fraud. When a civil suit for tax fraud follows a criminal proceeding for tax fraud, the doctrine of “collateral estoppel” may apply. Under this legal theory, provided certain technical requirements are met, once an issue is decided in one proceeding, it may not be retried again in a second proceeding.

This doctrine may be helpful to either the government or the taxpayer, depending upon the order of the civil/criminal proceeding and the outcome of the first case.

Consider first a criminal proceeding followed by a civil proceeding. If the government wins the criminal tax evasion suit, the taxpayer generally is “collaterally estopped” in the second (civil) proceeding from contesting that he committed fraud. Why? Because the government already proved fraud “beyond a reasonable doubt” and for the civil suit it needs even less evidence than that (requiring only “clear and convincing” evidence).

Alternatively, suppose the taxpayer is acquitted of criminal tax evasion in the first suit. Does collateral estoppel help the taxpayer? Unfortunately for the taxpayer, no, it does not. The first suit showed conviction was not provable “beyond reasonable doubt.” It remains to be seen in the civil suit whether it can be established using the lower evidentiary standard of “clear and convincing evidence.”

Now consider the reverse order of the proceedings, with the government first bringing a civil suit and losing—and then tries to bring a criminal suit for tax fraud. Does collateral estoppel help the taxpayer? It may; the taxpayer may attempt to collaterally estop the government in the second (criminal) proceeding from asserting the existence of fraud. In other words, under this scenario the doctrine of collateral estoppel helps the taxpayer.

In sum, the differences between a criminal and a civil suit are huge. It is best to speak with a qualified tax attorney, like one of the partners at Milikowsky Tax Law, to help you walk through these important nuances before the situation gets out of hand.