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Was it tax evasion or just tax avoidance?

On Behalf of | Mar 22, 2023 | Tax Law

Taxes are due annually, often several times a year if someone is an independent contractor. Paying a significant portion of one’s wages to the Internal Revenue Service (IRS) and state government can be a frustrating experience.

Hard-working employees and business owners alike may feel as though they lose an unreasonable portion of their income to the state. Greater annual income often directly translates to higher tax obligations. It is only through the careful application of tax rules that people can reduce what they pay in order to maximize their annual tax refunds.

Especially for higher-earning adults and those who own a business, it’s common to employ assertive and relatively creative tactics in an attempt to diminish income tax obligations. However, sometimes, those efforts will cross the fine line between tax avoidance and tax evasion.

What is tax avoidance?

The IRS recognizes that tax avoidance is a normal and legal behavior. Thousands of people will do whatever they can to reduce their income tax responsibilities by claiming exemptions, donating to charity and otherwise seeking to minimize their taxes due.

The strategic use of rebate programs and other tax incentives can help people lower what they have to pay each year. Tax avoidance, when done in compliance with current IRS regulations, is perfectly legal.

What is tax evasion?

Tax evasion involves trying not to pay taxes for which a person is actually responsible. Tax evasion might look like intentionally not reporting certain streams of revenue or trying to apply exemptions and write-offs for which someone does not qualify.

Any significant misrepresentation of circumstances intended to diminish tax obligations might constitute tax evasion rather than tax avoidance.

What happens when the IRS suspects evasion?

Those accused of tax evasion, tax fraud or other tax-related criminal activity could face several consequences. They might have to pay a huge past-due tax balance and interest, as well as penalties. In some cases, the IRS may even push for someone’s prosecution, which could lead to jail time.

Carefully responding to claims of tax evasion will benefit those who have tried to minimize their taxes and do not want to face criminal consequences for doing so. Seeking legal guidance can help to ensure that someone’s case is as strong as it can possibly be under the circumstances.