Tax evasion is an illegal practice where a person, organization or corporation intentionally avoids paying his true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties.
Tax evasion applies to both the illegal nonpayment as well as the illegal underpayment of taxes.
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 but they can also be found guilty of official charges and may be required to serve jail time.
Determining Intent to Evade Taxes
When determining if the act of failure to pay was intentional, a variety of factors will be 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 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.
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.
The expanding use of tax avoidance in the tax code has led to it becoming very complex. 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.
Evasion versus Avoidance
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 accounts. In the case of an Individual retirement account, taxes on the invested funds are not paid until the funds, and any applicable interest payments, have been withdrawn.