Much about our tax system is complicated - the forms are complicated and the laws are complicated. Mistakes are made. When do those mistakes rise to the level of tax evasion?
The key is intent. If you use the laws to your advantage, that is tax avoidance. If you make a mistake and inadvertently underreport income or overestimate a deduction, that is considered tax avoidance as well and the IRS will simply demand a correction and, perhaps, a penalty.
If you intentionally misreport income, credits or deductions, then that is tax evasion or tax fraud and you can face a felony charge.
The tax system is based on voluntary compliance. It's the taxpayer's responsibility to report all income. Taxpayers are well within their rights to claim all deductions and credits as long as they can provide proof of qualification. This requires good documentation and record-keeping.
Making a mistake is normal as well. If the IRS finds a mistake, you will be required to provide documentation. Once the mistake is uncovered, you will have to pay what you owe and perhaps a fine.
To be guilty of tax evasion, prosecutors must show you willfully avoided assessment or payment.
Penalties can include the back taxes as well as fines of up to $100,000 for individuals or greater. Prison terms of up to several years are also possible.
- Underreporting income such as tips or gambling winnings
- Taking unearned deductions such as overstating the size of the family
- Not filing a return
- Underpaying taxes
Other incidents occur when businesses avoid paying employment taxes or sales taxes.
The best way to avoid tax evasion is knowing the tax laws. It's always a good idea to find a qualified tax attorney to shepherd you and your business through the thicket of tax laws.