Income taxes consume quite a bit of an individual’s paycheck and, therefore, directly affect their overall standard of living. When filing annual income tax returns, most working adults understandably want to minimize how much they end up paying the government.
Some people utilize more creative approaches to this process than others. If the Internal Revenue Service (IRS) discovers that someone has underpaid their taxes, it will very likely audit that individual or possibly even file criminal charges against them. Therefore, some people are anxious about the idea of seeking to intentionally limit what they pay in taxes because they want to avoid prosecution. What they may not realize is that not every attempt at reducing income tax obligations actually constitutes tax evasion.
There is a difference between evasion and avoidance
Even the IRS recognizes that people have an interest in reducing what they pay and that there are totally legal ways to do so. Charitable donations and contributions to retirement funds can both serve as a way to reduce someone’s total taxable income for the year. Those who make use of legal systems protected by the current tax code to minimize or avoid taxes won’t usually have to worry about any enforcement efforts from the IRS. However, when someone intentionally misrepresents their circumstances, they cross the line into criminal tax evasion.
Tax evasion might look like claiming dependents that don’t exist or failing to report certain types of income on a tax return. Should the IRS discover evidence of intentional evasion of taxes by fraudulent misrepresentation of an individual’s circumstances, the organization may initiate an audit or may even pursue tax fraud or other criminal charges against that individual.
There’s a very fine line between evasion and avoidance, and sometimes people end up accused of a crime because of something that a professional that they hired did rather than something they intentionally did themselves. It is often possible to respond to tax evasion claims in a manner that could eliminate or at least reduce the financial and criminal penalties that the government might impose for someone’s underpayment.
Clarifying the difference between tax avoidance and tax evasion can help people better respond to a letter from the IRS and/or make better choices about how they manage their tax obligations each year.