
The terms tax evasion and tax fraud have frequented the headlines and are used interchangeably but are never fully defined. Tax evasion is the illegal act of intentionally underreporting income, inflating deductions, or hiding money and assets to reduce the amount of taxes owed to the government. It involves deliberate actions to deceive tax authorities and avoid paying taxes that are rightfully owed. It is not making an honest mistake on your tax return or failing to pay estimated taxes, although you should still make estimated tax payments if your tax preparer recommends that you do so.
Tax evasion is a criminal offense that can result in large fines and, in some cases, imprisonment. Some common methods of tax evasion are underreporting income, taking excess deductions, hiding money in offshore accounts, and transferring assets to family members or entities in order to obscure ownership. Underreporting Income is probably the most common form of tax evasion among taxpayers. It involves taxpayers lowering their income, thereby lower their tax liability, by not reporting income earned through various sources, such as side jobs or investments. It’s important to remember that not only does the IRS have access to your bank information, but they also look at your spending to determine if you are underreporting your income. So, if you are a contractor who isn’t reporting your cash paying jobs as income, but you’re driving around in an $85,000 truck, that is going to raise suspicion.
The rise of tax preparation firms inflating deductions to lower a client’s tax liability has been an area of recent concern for the IRS. Some businesses exaggerate their clients’ deductible expenses, such as business expenses, charitable contributions, or educational expenses, to get their customers a larger refund and then be able to charge a higher fee for the tax preparation. Whether or not you use a tax preparer, the information on your return is your responsibility and it is always highly recommended that you review your return before submitting it to the IRS. And always make sure to research a firm before using them to prepare your return to make sure they are reputable.
Offshore accounts are bank accounts outside of the US that taxpayers use to hide assets from tax authorities. Offshore tax evasion involves not reporting foreign financial accounts and income generated from them. This method of tax evasion usually carries a very high price tag that can result in fines that are greater than the assets being kept in the offshore accounts. Shuffling Assets or transferring assets between family members or entities to obscure ownership and minimize tax liability is a less common form of tax evasion, but it is one to be aware off. Members of a family who are higher earners may shift assets to lower income family members to lower their tax liability.
While tax evasion is a specific form of tax fraud, tax fraud can involve various other deceptive practices that may not always result in criminal charges. Tax fraud can include tax evasion, tax avoidance, false statements, and identity theft.
Tax fraud we already discussed in detail, but tax avoidance can sometimes involve legal methods of lowering a taxpayers’ tax liability, so it’s important to consult a tax professional about those methods to keep yourself out of trouble. False statements include falsifying information on your tax return and giving false return information to the IRS. Identity theft occurs when someone uses your name and social security information to file an incorrect return to get a tax refund they are not owed. While this doesn’t make the taxpayer whose identity is stolen liable, it can create huge issues for the taxpayer in getting the information corrected.
The consequences of engaging in tax evasion and tax fraud can include substantial fines and even imprisonment. The IRS may also seize your personal assets to satisfy the tax debt, including your home, vehicles, or bank accounts.
Tax evasion can also damage your credit, making it harder to secure loans, investments, or employment opportunities. You may also trigger scrutiny from tax authorities, leading to recurring audits and investigations.
Tax evasion and tax fraud are serious offenses that can result in severe consequences. It is important to understand the distinction between legal tax avoidance and illegal tax evasion. Staying informed about tax laws and seeking professional advice can help individuals and businesses navigate the complex world of taxes. Remember, honesty and compliance with tax laws are key to preventing the repercussions tax fraud can cause. The IRS won’t normally penalize you for making an honest mistake.
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