What is Tax Evasion

Tax Avoidance Vs. Tax Evasion

BREAKING DOWN Tax Evasion

Determining Intent to Evade Taxes

Tax Evasion Versus Avoidance

Criminal Charges for Tax Evasion Tax Evasion

Tax evasion is an illegal action in which a person or entity deliberately avoids paying a true

tax liability . Those caught evading taxes are generally subject to criminal charges and substantial
penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax
code.

Tax evasion applies to both the illegal nonpayment as well as the illegal underpayment of taxes. Even if a
taxpayer fails to submit appropriate tax forms, the IRS can still determine if taxes were owed based on
the information required to be sent in by third parties , such as W-2 information from a person’s
employer or 1099s. Generally, a person is not considered to be guilty of tax evasion unless the failure to
pay is deemed intentional.

When determining if the act of failure to pay was intentional, a variety of factors are considered. Most
commonly, a taxpayer’s financial situation will be examined in an effort to confirm if the nonpayment
was the result of committing fraud or of the concealment of reportable income.

A failure to pay may be judged fraudulent in cases where a taxpayer made efforts to conceal assets by
associating them with a person other than themselves. This can include reporting income under a false
name and Social Security number (SSN) , which can also constitute identity theft. A person may be
judged as concealing income for failure to report work that did not follow traditional payment recording
methods. This can include acceptance of a cash payment for goods or services rendered without
reporting them properly to the IRS during a tax filing.

In most cases of corporate tax evasion listed on the IRS website , the tax liability was underrepresented.
Many business owners undervalued the sums of their receipts to the agency, an act which was deemed
to be the purposeful evasion of tax. These were documented to be sources of income, revenue and
profits that were not accurately reported.

While tax evasion requires the use of illegal methods to avoid paying proper taxes, tax avoidance uses
legal means to lower the obligations of a taxpayer. This can include efforts such as charitable giving to an
approved entity or the investment of income into tax deferred mechanism, such as an individual
retirement account (IRA). In the case of an IRA, taxes on the invested funds are not paid until the funds,
and any applicable interest payments, have been withdrawn.
Failure to pay proper taxes can lead to criminal charges. In order for charges to be levied, it must be
determined that the avoidance of taxes was a willful act on the part of the taxpayer . Not only can a
person be liable for payment of any taxes that have been left unpaid, they can also be found guilty of
official charges and may be required to serve jail time. According to the IRS, the penalties are:

Jail time of no more than five years

A fine of no more than $250,000 for individuals or $500,000 for corporations

Or both, along with the costs of prosecution

What is Tax Avoidance

Tax Avoidance Vs. Tax Evasion

BREAKING DOWN Tax Avoidance

Tax Avoidance Is Encouraged

Tax Avoidance Complicates the Tax Code

Tax Avoidance vs. Tax Evasion Tax Avoidance

Tax avoidance is the use of legal methods to modify an individual's financial situation to lower the
amount of income tax owed. This is generally accomplished by claiming the permissible deductions and
credits . This practice differs from tax evasion, which uses illegal methods, such as underreporting
income to avoid paying taxes.

Most taxpayers use some form of tax avoidance. Even though it may seem negative, it really isn't. In
fact, tax avoidance is a legal way for people or other entities to minimize their tax liability. These can be
in the form of deductions or credits used to their advantage to lower their tax bills.

For example, individuals who contribute to employer-sponsored retirement plans with pre-tax funds are
engaging in tax avoidance because the amount of taxes paid on the funds when they are withdrawn in
retirement is usually less than the amount the individual would owe. Furthermore, retirement plans
allow taxpayers to defer paying taxes until a much later date, which allows their savings to grow at a
faster rate.

Tax avoidance is built into the Internal Revenue Code (IRC) , which spans more than 75,000 pages.
Lawmakers have used the IRC to manipulate taxpayer behavior by offering tax credits, deductions and
exemptions in various aspects of people’s lives including healthcare, saving and investing, education,
energy use and other activities. The tax benefits available in qualified retirement plans are to promote
self-sufficiency in retirement. The death benefit of a life insurance policy is exempted from taxes to
encourage family protection. Capital gains are taxed at a lower rate to encourage more investments.
Interest deductions on home mortgages foster more home ownership.
The expanding use of tax avoidance in the tax code has led to it becoming one of the most complex tax
codes in the world. Taxpayers spend billions of hours each year filing tax returns with much of that time
used looking for ways to avoid paying higher taxes. Because the tax code is always changing, families
have a difficult time making decisions about retirement, savings and education. Businesses especially
suffer the consequences of an ever-evolving tax code that affects their hiring decisions and growth
strategies. Since 2006, nearly 4,500 federal tax rule changes have been made to the tax code, most
having to do with tax avoidance provisions.

Tax avoidance is at the core of most proposals seeking to reform the tax code. The proposals that have
been introduced over the last decade seek to simplify the tax code by flattening the tax rates and
removing most tax avoidance provisions. Tax reform proposals assume a lower, flat tax rate would
eliminate the need to pursue tax avoidance strategies.

Contrary to what you may believe, tax avoidance is encouraged and legal, despite any negative image it
may conjure up. Tax evasion , on the other hand, is illegal. It happens when people underreport, or don't
report at all, any income or revenue earned to a taxing authority. You can also evade taxes by not paying
your taxes at all. Tax evasion is, in most places, a crime. If found guilty of committing tax evasion, the

Internal Revenue Service (IRS) says people can serve jail time, pay a fine or both.

Tax evasion is the illegal evasion of taxes by individuals, corporations , and trusts . Tax evasion often
entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to
reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or
gains than the amounts actually earned, or overstating deductions.

Tax evasion is an activity commonly associated with the informal economy . One measure of the extent
of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the
amount of income that should be reported to the tax authorities and the actual amount reported.

In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and
avoidance can be viewed as forms of tax noncompliance , as they describe a range of activities that
intend to subvert a state's tax system, although such classification of tax avoidance is not indisputable,
given that avoidance is lawful, within self-creating systems. [1]