There is an aphorism stating that the only certain things in life are taxes and death. Plenty of people go to extreme lengths to avoid death and extend how long they live. Modern technological advances have allowed people to stave off signs of advanced age and medical decline using a combination of cosmetic procedures and cutting-edge, sometimes even questionable, medical procedures.
Many people go to similarly drastic lengths in their efforts to avoid income tax obligations. They hire professionals, make the largest retirement contributions they can and otherwise attempt to minimize what they contribute in income taxes. Some people become overzealous in their attempts to limit taxes. They may cross the line and end up accused of income tax evasion. They may then face a large income tax debt and might be at risk of criminal prosecution.
What separates lawful attempts to avoid tax from illegal attempts to evade income taxes?
Avoidance involves using the system
Tax avoidance generally entails hiring a financial professional and making use of the systems in place to provide tax relief to individuals. Credits, deductions and write-offs can all help limit what people ultimately pay in income taxes for the year.
Strategic spending, charitable donations and a careful analysis of financial records can help people avoid some of their tax obligations and minimize the final amount due when they file their final income tax return for the year. So long as the information provided to the Internal Revenue Service (IRS) is accurate, attempts at tax avoidance are theoretically lawful.
Evasion often involves fraud
Tax evasion is a crime that typically involves misrepresentation of some sort. In some cases, people don’t report income. They work under the table or conduct cash transactions when selling assets to avoid declaring the revenue as income.
Other times, they might try to use tax deductions or credits for which they are not eligible. They might claim dependents who are over the age of 18, in the household of another person or dead. They might misrepresent personal spending as business expenses. They might intentionally hide digital assets or international property with the intent of limiting their income tax obligations.
When people cross the line between making use of the system and overtly misrepresenting their circumstances, they put themselves at risk of tax evasion or fraud allegations. At that point, they may have to address a higher balance due because of penalties and interest imposed by the IRS. They could also be vulnerable to criminal prosecution in more serious cases.
Reviewing a situation surrounding an income tax controversy with a skilled legal team can help people plan an appropriate response. Those accused of tax evasion or fraud can potentially limit the consequences that they face with appropriate support and a reasonable legal strategy.