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3 Elements of Tax Evasion and How to Avoid It

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    Key Takeaways:

    • Tax evasion is illegal and occurs when a taxpayer fails to pay the tax they owe or deliberately underpays
    • Tax avoidance is legal, and involves a taxpayer taking advantage of the credits and deductions they’re eligible for
    • The three elements of tax evasion are:
      1. The existence of a tax deficiency
      2. An attempt to evade or defeat tax
      3. The taxpayer’s willingness
    • Six ways to avoid tax evasion:
      1. Report all income
      2. Pay all taxes you owe
      3. Legally maximize your income
      4. Always be honest
      5. Remember tax avoidance is legal
      6. Get legal help from a tax expert
    • Common tax-paying pitfalls include making mistakes on your tax return, missing deadlines, claiming credits you’re not eligible for, or failing to pay estimated quarterly taxes

    Paying taxes is something many Americans dread. They may not support high tax rates or they simply struggle to afford their tax bill each year. Unfortunately, this leads to issues like tax evasion, which may lead to criminal charges for the taxpayer. 

    Tax evasion is a significant issue in the United States. Around one in six dollars of federal taxes owed isn’t paid, and the unpaid tax amount is about three-quarters the size of the federal budget deficit. It’s important to point out that tax evasion is illegal and tax avoidance is not. The two are completely different to the IRS.

    This guide covers what tax evasion is (and what it isn’t), the three basic elements of tax evasion, and six steps you should take to avoid this offense.

    What Is Tax Evasion?

    The IRS defines tax evasion as “the failure to pay or a deliberate underpayment of taxes.” It is illegal and can be a very serious offense. Anytime someone doesn’t pay what they owe or they’re purposely reporting too little income, it could lead to a tax evasion charge. Each taxpayer has a responsibility to report all of their taxable income and pay the tax they owe on that income to the government.

    Tax evasion may happen when someone doesn’t report all of their taxable income for a given year. It’s common, for example, for someone to fail to report income they get from gambling or from engaging in illegal activities to earn the money. 

    Work that doesn’t always involve official tax forms, like informal babysitting arrangements or garage sales, may be left off a taxpayer’s tax return, even though that income is taxable. This side of earning is often known as the underground economy, and because of it, there’s a big tax gap in the U.S. that costs the government billions of dollars.

    Failing to pay taxes owed leads to penalties from the IRS, on top of what you have to pay in back taxes. Both individuals and corporations can be charged with tax evasion for engaging in these illegal tax reporting and tax-paying activities.

    What Is Tax Avoidance?

    Tax evasion is different than tax avoidance. Tax avoidance, despite how it sounds, is not illegal. It happens when someone takes an action to lower their tax liability and maximize their income after paying taxes. This means people can avoid paying too much tax by taking advantage of legal credits and deductions to their income that the IRS allows. These credits and deductions may be for homeowner expenses, large families, childcare costs, student loan interest, adoption, charitable donations, and more.

    The legal avoidance of tax is not considered tax evasion since taxpayers are using the resources and benefits available to them. Understanding these differences is the first step to avoiding tax evasion and its subsequent consequences.

    Three Elements of Tax Evasion

    Each instance of tax evasion may look a little different. It involves some kind of underpayment and dishonesty from the taxpayer to avoid paying the tax they owe and fool the IRS. There are three basic elements of tax evasion outlined in Title 26, Internal Revenue Code, Section 7201, which the government must prove to convict someone of tax evasion. Here’s what those three elements are:

    1. The Existence of a Tax Deficiency

    The IRS will look for an existence of additional tax that is due from the taxpayer, such as when they owe substantially more than what they reported on their tax return. This element may be caused by:

    • Omitting or understating income
    • Claiming improper deductions or credits
    • Providing false income information

    Government officials will look at a taxpayer’s income evidence, like their bank statements, to determine whether they underreported or failed to report.

    2. An Attempt to Evade or Defeat Tax

    This element is where dishonesty and deceit come into play. A business could have kept two different ledgers for business transactions, for instance, to conceal certain forms of income. Another example could be if they purposefully used false numbers in their books to make it look like they made less money. Some taxpayers may also destroy records that are relevant to their tax obligation. 

    3. The Taxpayer’s Willfulness

    The third element is a taxpayer’s intentional and voluntary tax law violation. The taxpayer must have willfully evaded paying the tax they owe the IRS. This is where many people charged with tax evasion may argue that they didn’t know they violated any laws. This can be hard to prove.

    Section 7201 of the tax code outlines that tax evasion prosecution is limited to six years from when the offense takes place. Taxpayers are usually considered guilty of tax evasion only if they committed the crime knowingly. 

    You never want to involve yourself in tax evasion. Contact a tax attorney if you’re worried about your situation or have questions about tax laws.

    Six Ways to Avoid Tax Evasion

    Tax evasion is a serious offense in the United States. It could lead to a felony charge, hundreds of thousands of dollars in fines, and even imprisonment. Do everything you can to follow laws and regulations and avoid tax evasion at all costs. The following steps may help you:

    1. Report All Income

    Many people mistakenly believe that receiving income outside of a traditional workplace or contract means you don’t have to report it to the IRS. But you must report all income you earn during the year on your tax return, even if the person who paid you does not send you a 1099 tax form. Underreporting income can lead to a tax evasion charge, so be careful to include everything, especially if you have a side gig that is easy to forget about.

    2. Pay All Taxes You Owe

    Reporting your income is just half of your responsibility. Pay all the tax you owe to the IRS, and pay it on time. You never want to get in trouble with underpaying, thinking that the government won’t notice. 

    3. Legally Maximize Your Income

    There are plenty of ways to maximize your income and pay the least amount of tax legally possible. Strategies may include saving for retirement with pretax dollars, claiming credits you are eligible for, or taking deductions to lower your taxable income. Sometimes a simple change to your investment strategy can help you minimize what you have to pay in taxes. 

    4. Be Honest and Never Try to Deceive the IRS

    Unfortunately, many taxpayers believe they can get away with changing a number here and there or that they can keep records from the IRS. But this strategy backfires. You will end up paying a lot in fines at the very least, on top of what you owe for taxes. Always be honest. Admit any mistake right away and correct it with the IRS. Contact the agency if you have questions or need to resolve something. It is never worth trying to hide anything from them.

    5. Remember Tax Avoidance Is Legal

    Some people hear “tax avoidance” and assume it is the same thing as tax evasion. However, tax avoidance is not a crime and it is completely legal if you do it right. Focus on taking all credits and deductions you can. Pay close attention to changing tax laws. The government often implements new forms of relief for individuals and businesses, so assess whether you qualify for these benefits.

    6. Get Legal Help

    Talk to a legal professional right away in the event of tax evasion. You don’t want to handle these situations on your own. An attorney can help you understand any charges and the best way to move forward to resolve the situation and get you the best possible outcome. Never try to falsely deny anything the IRS is claiming against you. Talking to an expert is the first step.

    The bottom line with tax evasion is to always stay honest and take only legal steps to reduce your tax burden. Navigating your tax requirements on top of credits and deductions can be overwhelming and complicated. Work with a tax professional when you’re unsure about what you qualify for.

    Common Pitfalls of Paying Taxes Properly

    Sometimes you simply need to update your practices to ensure you are following tax laws properly. Learning about these common pitfalls can help you stay compliant and avoid a lot of tax-time headaches:

    • Always check your tax return information for mistakes. It is very common for taxpayers to miscalculate something or include an error. Ensuring accuracy can help you avoid penalties or confusion.
    • Check eligibility requirements carefully before claiming a credit or taking a deduction. The IRS may think you are trying to be deceitful if you claim a tax break when you don’t qualify.
    • Pay estimated taxes each quarter if you are a sole proprietor, partner, S corporation shareholder, or corporation. These types of individuals and entities need to pay taxes as they earn income throughout the year. Avoiding this tax means you will probably owe the IRS a fee.
    • Create a calendar of deadlines or a detailed tax schedule so you never miss a due date. Paying the tax you owe on time will help you stay in good standing with the IRS.
    • Prepare for taxes all year. Stay ahead of savings and make sure all your financial information is organized so tax time is easier. Keeping organized and accurate records can help you prevent making mistakes on your tax return.
    • Respond to IRS notices immediately. The agency may send you requests for more information or documentation, or they may notify you of a penalty. Never ignore these letters. Respond right away and follow all directions they provide.

    You want the IRS on your side so you never have to deal with tax fraud investigations, audits, or tax evasion charges. Follow all tax laws and be deliberate about keeping records. When in doubt, talk to a tax expert who can help you stay prepared all year.

    Contact an Expert Tax Attorney at Silver Tax Group

    Getting into trouble with the IRS can be very serious – and stressful. You never want to knowingly do anything to deceive the government, like avoiding paying the tax you owe or underreporting your income. Your goal should be to avoid tax fraud and evasion charges at all costs.

    Paying taxes and reporting your income properly can be complicated, however. Businesses and individuals alike are often eligible to take certain tax breaks, but many taxpayers have no idea what’s available to them. Work with tax experts to uncover all of your possibilities.

    The team at Silver Tax Group is ready to help you succeed. We help clients facing tax fraud charges, dealing with tax debt, handling an audit, or in need of litigation or defense. We will consult with you to determine the best strategy to move forward, no matter the issue you’re facing. Reach out to Silver Tax Group to speak to an expert about tax evasion and tax avoidance.

    Learn More About Your Taxes

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