Tax filing season is here, which often means people will soon find themselves dealing with letters related to unpaid taxes or even advising them of an upcoming audit of their financial records. While business owners and independent contractors typically have an obligation to file quarterly tax payments with the government, many individuals only file once a year.
When that time comes, it is typical for people to take any steps necessary to reduce their total tax liability. The decisions someone makes while filing their tax return could well be the difference between minimizing their tax obligations and putting themselves at risk for criminal charges and severe tax penalties.
While tax minimization, also known as tax avoidance, is completely legal, tax evasion is a crime that could haunt you for many years to come. Knowing the difference between the two can help you avoid unintentionally breaking the law in your attempt to avoid overpaying your taxes.
What constitutes tax evasion?
There are many ways in which someone could avoid their obligations to pay income taxes. One such method is choosing to work in under-the-table arrangements. Informal employment opportunities typically involve someone paying you with cash and not withholding any income taxes from those funds. That can be a tempting prospect for those who struggle to make ends meet, but it is also a textbook example of tax evasion.
If you earn money at any job or through a business or hobby, you have an obligation to record that income and report it as part of your income tax filing to the Internal Revenue Service. Even amounts too small to require tax documentation from an employer are still part of your tax obligation.
Working for a person or business that does not withhold your taxes intentionally and not reporting that income is a form of tax evasion. Intentionally under-reporting your income or falsifying your tax forms to include more deductions are also forms of tax evasion that could result in criminal charges or at the very least, a stressful audit of your tax returns and financial records.
Tax avoidance is not the same thing as fraud or evasion
Individuals with substantial income or accrued assets will often take drastic steps to minimize the tax implications that come with their good fortune. Creating and funding a trust with assets ranging from financial investments to real estate is one way in which individuals minimize some of their tax obligations.
Charitable giving and other strategic decisions can make a major difference in how much tax liability an individual has. It is perfectly legal to maximize your deductions and minimize your taxes through the careful application of the tax code. However, it is illegal to under-report your income or otherwise fail to report income you should pay taxes on.