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Tax Evasion Penalties: All About Tax Violations and the Penalties

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    Have you ever wondered what would happen if you didn’t file a tax return? Tax law for states is different than that of the federal government. 

    Filing your taxes is no fun and the tax preparation process can be arduous. So, why does anyone do it? Because evading your taxes is a crime. Tax evasion penalties include fines, back taxes, and even jail time.

    If you can’t pay your taxes for financial reasons the IRS works with you on a payment plan. A tax violation is different than the inability to pay. In this article, you learn all about what constitutes a tax violation.  

    Find out what will happen if you don’t file or pay your taxes. Learn about tax violation law and the penalties that follow. And, get an answer to the question, is tax evasion a felony?

    Tax Law Tax Evasion Penalties

    Tax Evasion Penalties: Your Beginners Guide to Tax Violations

    To answer the prevalent question, “Is tax evasion a felony?”, the answer is yes. Tax evasion is a felony crime, but it is different than just failing to file a return. To begin with, there is a big difference between not filing a tax return and not paying your taxes.

    The Internal Revenue Service (IRS) still receives copies of your tax information, regardless of whether or not you file. In lieu of your submission, the IRS will assess your tax liability and send you a bill. If you don’t pay the bill that they send you, then, you are committing tax evasion.

    So, why not just let the IRS bill you for your taxes, instead of doing the leg work yourself? Because the IRS has no incentive to assess your deductions. The tax bill you receive from the IRS is for substantially more money than if you were to make standard deductions on your own.

    And, the IRS doesn’t make it easy if it has to bill you for your taxes.

    If you receive an IRS bill in the mail, you have 30 days to respond in three ways. First, you can accept their version of your taxes, pay it, and move on with your life. Second, you can submit your own return that states your deductions.

    The third option is for those who do not need to pay income tax. If you fall under the IRS tax threshold you can submit a form that explains why you are not required to file federal income tax.

    If you fail to respond to the first letter from the IRS within 30 days, you receive another 90 days to respond to their second letter. During these 120 days, your taxes compound up to an additional 25 percent of your outstanding amount.

    On the other hand, if your taxes are submitted on time, but you don’t pay everything you should, you only incur 0.5 percent interest each month on your outstanding taxes. The penalty for filing over 60 days late is $135 fee, minimum–on top of your outstanding interest fee.   

    So, when thinking about tax fraud and tax evasion, remember, you are not hiding from the IRS by being negligent on your taxes. You are just giving the IRS more money in the long run.

    If you willfully try to misrepresent your taxes or hide taxable income, then you are committing some serious crimes.

    Tax Law Tax Evasion Penalties

    Tax Fraud and Tax Evasion

    Tax fraud and tax evasion are often misconstrued as the same thing. There are big differences, however, that distinguishes fraud from evasion. When it comes to tax violations, punishment can take the form of, both, civil and criminal penalties.

    Civil, means you have to pay a fine to the court. Criminal, means you are going to jail.

    The laws regarding tax fraud can be found in Title 26 of the Internal Revenue Code, and Title 18 of the United States Code. The Internal Revenue Code is specific to taxes and tax law, whereas the United States Code concerns crimes and criminal procedures.

    Tax Law Tax Evasion Penalties

    What is Tax Fraud?

    Tax fraud is an umbrella term for a number of violations. When you knowingly try to defraud the government out of paying your rightful taxes, that is tax fraud. The distinguishing factor is that of willful intent.

    The burden then falls on the government to prove that an individual knowingly and willfully violated tax law in order to get out of paying their taxes. This is a difficult task since the tax code is so long and complicated.

    Often, the government penalizes tax fraud with civil charges, instead of criminal charges.

    Tax Law Tax Evasion Penalties

    What is Tax Evasion?

    Under the umbrella of tax fraud, tax evasion is a specific criminal charge. If the government chooses to pursue criminal charges for tax fraud it is usually for tax evasion. Tax evasion is the charge for which Al Capone was convicted and sentenced to prison.

    Proof of deliberate misrepresentation of taxable income to the IRS is grounds for charges to be brought for tax evasion. Tax evasion charges are brought for not declaring all of your taxable income and inflating deductible expenses.

    Charges of tax evasion can also be brought against an individual that fails to file their taxes in an attempt to hide taxable income.

    Tax Law Tax Evasion Penalties

    Tax Violation Crimes and Penalties

    Incorrectly filing your taxes is not grounds for any criminal charge–unless there is proof of intention. If you deliberately avoided detection of your income for the purpose of getting out of taxes, that is a criminal offense.

    For example, receiving payment in cash that goes undeclared is tax fraud. You do not, however, have to declare income under $600 from any single source. If any client or employer pays you more than $600 you must declare it on your taxes.

    The telltale signs of tax fraud involve playing tricks to get around declaring income, like placing your assets in the name of your spouse. The IRS can charge you with willful failure to pay tax or file a return.

    This charge comes with prison time of one year, maximum–not to mention civil fines.

    Tax Law Tax Evasion Penalties

    Negligence vs Fraud

    So many people make mistakes on their tax filings that the IRS would be swamped with legal battles if they pursued everyone criminally. Instead, the IRS assumes that mistakes on your tax return are honest ones. Signs of fraud are blatant and negligence is far more common.

    But, negligence isn’t free. The IRS hands out fines like candy to those caught in tax negligence. It’s better than getting caught in tax fraud, though. The telltale signs of tax fraud include…

    • Under-reporting taxable income
    • Misrepresenting personal deductions as business expenses
    • Multiple sets of financial ledgers
    • Concealing or moving income
    • Falsifying business records
    • Filing with a false social security number
    • Filing deductions for nonexistent dependents
    • Overstating applicable tax exemptions and deductions

    If any of these sound like you, you should speak with a tax defense attorney immediately

    Tax Law Tax Evasion Penalties

    Who Are the Biggest Offenders of Tax Fraud?

    People who own their own business or work on contract can easily fall into bad financial habits. If you do a poor job of keeping your books it is difficult to accurately represent your taxes to the government. As you know–there is a difference, however, between negligence and fraud.

    The service industry attracts the most fraud when tax season rolls around. Tips and cash payments are rampant in the service industry. It is all too easy for bartenders and store owners to pocket the cash without recording it for later taxes.

    It all comes down to the individual’s intent. Bartenders rarely get prosecuted for tax fraud because of cash tips. Partly, it is too difficult to prove, but it is also not intentionally defrauding the IRS.

    A store owner that takes a little cash off the top before closing out the drawer, however, is committing tax fraud. The most common offenders are accountants, lawyers, doctors, car salespeople, fashion store owners, and hair salon workers.

    If the violations of tax fraud are substantial enough, the IRS involves their law enforcement division, called IRS Criminal Investigation (CI). If CI begins investigating your finances, you are in trouble.

    Tax Law Tax Evasion Penalties

    IRS Criminal Investigation (CI)

    The IRS has a sophisticated group of accountants, lawyers, and digital security experts to investigate allegations of criminal tax fraud. CI is called in for cases of money laundering, violations of the Bank Secrecy Act, and other tax-related crime.

    CI bypasses or hacks into computers to audit backlogged accounts and uncover information related to tax fraud. CI uses the evidence gathered to form devastating cases against offenders and seek harsh penalties.

    Federal Income Tax operates under voluntary compliance of the public. US citizens have the right to privacy, so the government cannot monitor everyone’s personal finances. This means that come tax season, the IRS relies on the participation and honesty of the American public.

    So, when someone is caught cheating the IRS, CI makes an example of them.

    How to Get a Handle on Your Taxes (and Avoid Tax Fraud)

    If you don’t pay your taxes because you file incorrectly, you are not a criminal. But, you might get a fine.

    If you find yourself in a pit of tax violation fees and compounding interest, there are several ways in which to regain control.

    Tax Law Tax Evasion Penalties

    Request a Tax Filing Extension

    Understanding when and how payments are due is the best way to avoid an audit. The date on which your tax filing is due is different than the date on which your payment is due.

    A tax filing extension gives you a little more time to put together your return. On April 15 of every year, your taxes are due for payment.

    If you have unpaid taxes, a filing extension does not stop interest from accruing. A tax filing extension affords you 120 additional days to file your return, but interest is still charged on that which is overdue.

    If you need more time to put a return together for the IRS, a tax filing extension can help.  

    Tax Law Tax Evasion Penalties

    Communicate with the IRS About Special Circumstances

    The IRS isn’t all fire and brimstone. In fact, the IRS is willing to grant exemptions to individuals going through extenuating circumstances. You can file an IRS Form 843 to request a waiver from IRS penalties and fees for back taxes due to special circumstances.

    The qualifications for this exemption include things, like natural disasters, hospitalization, or loss of work. The IRS needs a good reason to exempt you from late fees and charges, but they will if they can.  

    Tax Law Tax Evasion Penalties

    Request a Back Tax Installment Plan

    The IRS provides payment plan options for those who cannot afford to pay their back taxes and fees. The benefit of doing a payment plan is that the IRS knows you are accountable and communicative. That means you won’t be saddled with excessive fines.  

    The trick to this is to contact the IRS as soon as you think you can’t make the mark. The earlier, the better. If you fail to pay on time the automated billing system starts racking up your interest and you are on the juice.

    If your debt to the IRS is less than $10,000 you are automatically accepted.

    Tax Law Tax Evasion Penalties

    Offer in Compromise

    An offer in compromise is, technically, an option. It is tricky, however, to successfully negotiate these deals with the IRS without the help of a special tax attorney. Ideally, you give the IRS what you can, and they forgive the rest.

    This option is most applicable to those facing large fines on large income. If you don’t have the money to pay your taxes, you probably don’t have the money for the $150 application fee, or attorney fees. An offer in compromise is a good way for the IRS to save money on litigation while still getting something from tax violators.

    An offer in compromise comes from the taxpayer and can either propose a single-payment or installment plan for repayment. An installment plan cannot exceed 24 months, and 20 percent must be paid upfront.

    The rub, however, is that the IRS can choose to hear your offer, take the 20 percent, and deny your compromise offer. Talk about a bummer. Whatever they collect, however, gets put towards that which you owe.

    Making Sense of Felony Tax Evasion

    Is tax evasion a felony? Yes–but you shouldn’t worry about accidentally stumbling into tax evasion. It is a willful act, with the intent to hide taxable income or misrepresent your tax return. If you need help filing your taxes, the IRS is more than happy to give you a hand.

    If you like this article share it with others and check out the blog for more information on offers in compromise. Thanks for reading!

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