If you’re hiding assets or trying to conceal income from the IRS, you too may be at risk.
What is tax evasion?
The U.S. income tax system is based on the idea of voluntary compliance with tax laws. As a taxpayer, you are required to report all your income and pay your taxes on time. Intentionally evading these obligations is illegal. Here are a few examples of tax evasion.
You may think it’s easy to hide cash payments or cryptocurrency sales from the IRS, but the IRS has ways to prosecute them.
Intentional overreporting of tax deductions
If you intentionally overstate expenses or contributions in order to get a larger deduction, you could get in trouble with the IRS.
Use of ineligible tax credits
If you know you don’t qualify, don’t risk being audited or prosecuted for tax fraud – it’s not worth it.
Hiding property and other assets
Hiding offshore bank accounts and other assets is a high-risk activity.
Most cases of tax evasion are initiated after a tax audit. The tax authorities may also initiate a criminal investigation if they receive additional information or intelligence indicating that you are knowingly and willingly evading your tax obligations. The tax authorities rarely initiate tax fraud proceedings against people who are unable to pay their taxes. However, if they can afford to pay but are unwilling to do so, the situation is different.
What is the difference between tax evasion?
Unlike tax evasion, tax avoidance is legal. There are legal ways to avoid paying taxes, such as taking advantage of appropriate tax credits or deductions. For example, if you qualify for the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC), this is one way to reduce your tax liability. You can also avoid paying taxes by contributing funds to a pension account or donating to charity. However, if you claim a deduction or credit that you are not entitled to, you may be guilty of tax fraud or evasion.
Possible IRS Actions
The IRS can take various actions if it believes you are evading taxes. At a minimum, certain penalties and fees may be imposed on you, including
- penalties for not filing a tax return
- penalties for not paying taxes
- penalties for inaccuracies
- interest (including fines) on unpaid taxes
If you owe more than $10,000, the tax authorities may also seize your assets. They can also take other collection actions, such as wage garnishments and forfeitures.
In more serious cases of tax fraud, the tax authorities may impose a jail sentence. If convicted, the offender faces up to five years in prison and/or a fine of up to US$250,000 (individual). You can also be prosecuted by the tax authorities, which results in a criminal record. This means you will lose your right to vote, your right to serve on juries, and the right to own and use firearms. A criminal record can also impact your ability to get a job or obtain certain professional licenses.
Although tax evasion is rare, don’t assume that you can cheat the IRS. To avoid problems, you should always present accurate documentation and pay on time. If you’re not sure if you qualify for a particular deduction or credit, or if you need more time to pay your taxes, consult a tax advisor. A tax professional can help you claim all the deductions and credits you are entitled to. He or she can also help you plan your payments and determine if you are eligible for other tax credits.
Villie Walters Ramirez is a 32-year-old tax assistant at a tax firm who enjoys accounting, bookkeeping, and Brooklyn tax audit. She has a post-graduate degree in accounting. Further, she has a severe phobia of cats. She enjoys traveling A lot.