As tax season moves into high gear, thoughts turn toward how to improve tax efficiency.
There are a number of legal ways to reduce what you owe in taxes, thanks to deductions and credits. If you think about your expenses, and re-examine your position, it is quite likely that you will find a few commonly overlooked deductions and credits that you missed.
Additionally, with a little thought, it is even possible to reduce your tax liability for the previous year — even though a new year is under way.
However, there is a very real difference between employing legal and properly documented tax breaks to reduce what you owe, and evading taxes in order to avoid paying what you are bound to pay by law.
Tax evasion is a serious matter, and you need to be careful to avoid engaging in it.
What is Tax Evasion?
Tax evasion is intentionally avoiding paying what you know you owe to the government. There are different activities that are considered tax evasion. Some of these activities include:
- Refusal to file a tax return
- Taking fake deductions, or deducting more than you actually spent
- Claiming credits you aren’t actually entitled to
- Lying on your tax return
- Failure to report all of your income (including tips and cash)
- Failure to report offshore bank accounts and/or foreign income
- Claiming personal expenses as business expenses
- Claiming to transfer money in order to write it off — even though you didn’t complete the transfer
- Claiming extra exemptions
- Writing off losses (property, business, theft, etc.) that didn’t take place
- Writing off losses that you were reimbursed for by your insurance company
- Claiming expenses that you have already been reimbursed for
- Using sneaky accounting practices to make it appear that you have greater expenses or lower income than you do
- Putting your assets in someone else’s name to avoid paying taxes
As you can see, there are a number of actions that qualify as tax evasion.
However, the burden of proof is on the IRS to prove that your intent was to avoid paying what you owe. However, even if your inaccurate return was the product of an honest mistake, you will still be subject to repaying what you owe, and probably paying interest and penalties as well.
If you have been trying to avoid paying taxes, though, things can get much, much uglier.
What Happens to Tax Evaders?
Tax evasion comes with serious criminal charges. You can be sent to prison and you can be levied hefty penalties. In the case of willfully failing to file, you can be sent to prison for up to a year, and pay fines of up to $100,000.
Making a false statement can net you up to three years in prison and up to $250,000 in fines. The same penalties apply if you attempt to hinder an IRS representative in his or her efforts to get to the bottom of the situation or to collect.
When you are convicted of attempting to evade your taxes, or conspiring to defraud the United States by helping someone else evade payment, you could go to prison for up to five years, and pay fines of up to $250,000. And, all of these fines are on top of repaying what you owe, and covering the cost of prosecuting you.
Tax evasion becomes very expensive indeed. Tax evasion is considered a felony, so that means it will go on your record as such, and the public records relating to your tax debt will also be noted on your credit report.
The government also has a number of methods available to it for attempting to collect the money you owe. The government can take tax credits you are eligible for in the future, place liens on property that you own, garnish your wages, and even take money directly out of your bank account.
Before you take a deduction, and before you claim less income, check your records. In the event of an audit, you want to be able to show the documentation that backs up your claims. If you don’t have that documentation, and it appears that you are being evasive, the IRS could move forward with prosecution.
What Should You Do If You Can’t Pay Taxes?
Just failing to file your tax return can result in hefty cash penalties, and you don’t want to do anything that might trigger an interest in you as a tax evader. As a result, it is a good idea to be up front if you can’t pay your taxes.
File your tax return, and then contact the IRS. The IRS offers an installment plan that you can use to suggest a schedule that would be reasonable for repayment. It is also possible for you to suggest a settlement, where you offer to pay what you can, and the IRS forgives the rest (this is difficult, though, and hiring a knowledgeable tax attorney is vital in such situations).
In the end, it’s best if you adhere to the law, and show honesty in your tax dealings. You’ll have less to worry about.