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Distinguishing tax avoidance from tax evasion

The difference between tax avoidance and tax evasion may seem solely like a semantic one, but to the IRS, the differences are important.

There are distinct differences between criminal tax evasion and simply being negligent or overly aggressive when taking deductions, filing tax returns, taking credits or using exemptions.

Is it strategic tax avoidance?

The tax code is enormously complex, consisting of millions of words and tens of thousands of pages of text, crammed full of possible credits, deductions, exemptions, filing deadlines, payment information and more. It is certainly possible, in the midst of tax planning, to inadvertently or negligently, for example, attempt to claim some personal expenses as business-related deductions.

This action, misplaced as it may be, does not necessarily indicate criminal tax evasion. This is particularly true if the deductions were taken on the advice of a tax professional.

You may still face penalties, including repayment of improper deductions or exemptions, interest and reimbursement of any improperly claimed refund amounts. You could also be subject to an audit for the relevant tax year or years, and see your accounts flagged in the future.

Indicators of evasion

Typically, the difference between avoidance and evasion is intent. It is subtle in many cases, but quite telling. For example, a simple improper deduction is usually indicative of misplaced avoidance. Willfully failing to file tax returns for years, however, is a sign of evasion.

Other actions that indicate purposeful tax evasion include:

  • Concealing income transfers
  • Falsifying tax documents
  • Keeping two distinct, differing sets of financial information/ledgers
  • Claiming exemptions for non-existent dependents or non-existent businesses
  • Purposely under-reporting income
  • Using a fake social security number on tax documentation

If you are facing allegations of tax evasion, serious penalties could follow. Tax evasion convictions come with the possibility of:

  • Prison time
  • Huge fines
  • Repayment of improper deductions, credits or refunds received from evasion
  • Costs of prosecution
  • Financial penalties and interest

A skilled tax attorney should fight evasion or fraud allegations aggressively with experience handling these difficult cases in order to minimize potential penalties.


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