Tag Archive for: tax evasion

What's the Difference Between Tax Fraud, Tax Evasion, and Negligence

Paying taxes is required for the workforce and for businesses. No one wants to pay more taxes than required, but purposefully avoiding these payments can open your business up to criminal tax liability. While there are legal loopholes to pay fewer taxes, often framed as tax avoidance, there are also serious offenses when you choose to evade paying your taxes. 

There are different forms of tax manipulation, some of which are federal offenses and can land you in a criminal audit by IRS. IRS criminal audits can lead to hefty fines or worse–– prison time. With a 90% conviction rate, undergoing prosecution by IRS criminal is, indeed, a big deal. So what is the difference between legal avoidance or paying less, illegal tax evasion or paying nothing, and criminal tax evasion (fraud)? The intent is the biggest deciding factor when it comes to determining between fraud, evasion, and negligence. 

What is Tax Fraud?

Tax fraud is, “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believed to be owing.” 

A person or a business purposefully or intentionally manipulates information on a tax return to reduce or avoid the amount of taxes owed. Forms of tax fraud include: 

  • Claiming false deductions 
  • Claiming personal expenses as business expenses 
  • Using false Social Security numbers 
  • Underreporting income
  • Failure to report income 
  • Neglecting reporting payroll taxes 

Every year the government loses millions of dollars from tax fraud. The Internal Revenue Service (IRS) investigates these tax fraud cases to determine if the person or company under question intentionally avoided their taxes owed. Parties who are found guilty are required to pay fines, penalties or, in the case of criminal prosecution, serve prison time. 

What is Tax Evasion?

Tax evasion is a branch of tax fraud. Committing tax evasion is, “using illegal means to avoid paying taxes.” There is still intentional concealment to avert paying taxes. Different forms of tax evasion include: 

  • False or improper claims
  • Omitting or concealing revenue 
  • Purposely underpaying taxes 
  • Hiding interest 

The above list is very similar to the list of fraud criteria, the difference can often be subtle and lie in the harm caused or other criminal elements such as workers compensation fraud resulting in insurance fraud charges. When examining tax evasion cases, IRS views financial circumstances and financial history for suspicious activity or a history of attempts to evade taxes.

If the tax evasion activity is found to be deliberate, it is considered a criminal offense and punishable under federal law. The guilty party can be fined up to a quarter of a million dollars. An individual can be fined up to half of a million dollars for a business. They can also face up to five years of imprisonment.

Negligence 

Negligence is a third form of underpaying taxes. The key difference between tax evasion and negligence charges lies in intent. In the case of negligence, elements can include insufficient payment in taxes due to miscalculations or unintentional errors when submitting tax forms. In order to receive this result, you must prove that omissions were done purely out of error.

Although negligence determination is better than one of fraud or evasion, there is still the possibility of being fined up to 20% of the underpayment. 

Again, the biggest factor between tax fraud, tax evasion, and negligence is intent. Purposeful manipulation and concealing of income to avoid taxes is a punishable offense by the IRS. 

If you find yourself under audit by IRS, consult with our team of experts at Milikowsky Tax Law. Our team of attorneys are equipped to review your specific case and formulate a defense strategy specific to you.

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.