The Internal Revenue Service IRS evaluates financial statements from individuals and businesses and enforces federal tax law. Every year, people have to file an annual tax return with the IRS. Those who are self-employed or who run businesses may have to make quarterly payments in addition to filing an annual return.
The tax obligations that people have can amount to thousands of dollars a year, and most taxpayers would like to minimize what they pay. It is a theory, it is perfectly legal to try to minimize or avoid taxes, but it is illegal for you to evade taxes. How can you tell the difference between income tax avoidance and income tax evasion while getting ready to file your return?
Avoidance involves legal knowledge and careful planning
Tax avoidance is a legal practice that involves making the best use possible of the current tax rules. For example, donating to a favorite charity before the end of the year could be a way to avoid taxes on surplus income. Making use of credits for your children or for improvements made to your home can be another way to avoid some of the tax you have to pay.
So long as you are honest in the information that you report to the IRS and you apply current rules regarding credits and write-offs, your attempt to minimize your taxes should not violate the law.
What is tax evasion?
Tax evasion involves someone trying to get away with not paying taxes that they technically owe. Intentionally under-reporting your income by not claiming cash transactions at your small business could be a form of tax evasion. Claiming more deductions or credits than you legally have the right to claim is another form of tax evasion.
Intentionally misrepresenting your circumstances or improperly applying tax rules to your income tax return could lead to allegations of tax evasion.
What happens when the IRS suspects misconduct?
If the IRS believes that your conduct constitutes tax evasion, they may notify you of an upcoming audit. On the other hand, if they already have documentation, you may instead receive notice of tax fraud charges.
Learning more about tax law can help you respond to an IRS letter and avoid criminal consequences for what might ultimately just be a mathematical mistake.