Tax evasion is the deliberate and illegal failure to pay taxes owed to the government. Taxpayers found guilty of federal tax evasion face criminal prosecution.
How does tax evasion work?
All citizens and residents of the United States whose income meets a specified threshold are required to pay taxes to the Internal Revenue Service (IRS). Unethical individuals seeking to pay as little tax as possible resort to illegal methods to hide their income and assets to avoid paying these amounts.
Tax evasion refers to the deliberate and illegal failure to pay taxes to the federal government. Tax evasion strategies include reporting fake income or omitting income, inflating personal deduction amounts, keeping double financial records, falsifying accounting entries, claiming personal expenses as business expenses, and hiding income.
What constitutes tax evasion?
For the federal government to prosecute tax evasion, it must prove intent. To meet the intent standard, the prosecution must prove the following three elements beyond a reasonable doubt:
- Existence of unpaid tax liability
- Act by the defendant to evade tax or attempt to evade
- That the defendant has the specific intent to evade the known legal duty to pay taxes
Tax evaders rely on various tactics and complexities of U.S. tax law to illegally avoid paying their taxes. For instance, hospitality workers may report false income regarding their cash tips and file falsified tax returns reflecting less income than they actually earn. As long as the act of hiding income is intentional, this behavior constitutes tax evasion.
What are the penalties for tax evasion?
Individuals found guilty of tax evasion pay a steep price for their deception. Tax evaders must pay the owed amounts plus interest, and they may face fines up to $250,000 for individuals ($100,000 for offenses committed before 1985) and $500,000 for businesses, along with potential prison sentences of up to five years. Additionally, defendants under investigation for tax evasion face significant legal expenses.
Tax evasion vs. tax avoidance
Not all tax reduction strategies are illegal. Legal methods of reducing tax liabilities are called tax avoidance. Individuals may consult tax attorneys or accountants who specialize in exploiting U.S. tax law for the benefit of their clients.
People also legally reduce their taxes through mechanisms like charitable donations and tax-deferred retirement accounts.
Frequently Asked Questions (FAQs)
How can you report tax evasion?
If you suspect that an individual or business may not be paying the taxes they owe, you can report tax evasion to the IRS. You will need to fill out Form 3949-A – Information Referral. The IRS keeps the identity of those who report tax fraud confidential, and in some cases, reporting tax fraud may also lead to a reward.
What is the difference between tax avoidance and tax evasion?
Tax avoidance is a legal way to minimize taxes and improve after-tax income. This includes tax deductions, tax credits, and income adjustments. On the other hand, tax evasion is the illegal and intentional failure to report taxable income or pay taxes owed to the United States or other federal or state governments.
Source: https://www.thebalancemoney.com/what-is-tax-evasion-5190385
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