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When does tax avoidance cross the line into tax evasion?

On Behalf of | Mar 10, 2023 | White Collar Crimes

It is safe to say that almost no one wants to pay more in federal income taxes than what they are obligated to pay. Therefore, many people take advantage of tax credits and tax deductions found in the federal tax code to lower their tax liability. But when does legitimate tax avoidance cross the line into illegal tax fraud?

What is tax fraud?

Tax fraud is a federal crime. Tax fraud takes place when a person intentionally misrepresents a fact, hides assets or in some other way purposely and affirmatively avoids paying taxes that they owe. Tax fraud is also referred to as tax evasion.

Tax fraud may occur if you:

  • Purposely fail to report under-the-table income
  • Purposely fail to report income earned illegally
  • Purposely fail to report legally earned income such as tips or money selling items on Internet marketplace platforms
  • Misrepresent how many dependents you have
  • Misrepresent profits and losses
  • Misrepresent personal expenses as business expenses

Remember, tax fraud requires intention, so any of the above acts must be committed with the intent to evade paying what you owe in taxes.

If you simply make a mistake and forget to report certain sources of income, it is not tax fraud because you did not intend to avoid paying what you owe. However, you must file paperwork to correct your mistake and you will likely incur a 20% penalty applied to the unpaid amount that you owe.

The government bears the burden of proving criminal fraud beyond a reasonable doubt. Penalties for criminal fraud can include fines and/or imprisonment.

What is tax avoidance?

Unlike tax fraud, tax avoidance is a legal activity. A person is permitted to reduce, avoid or otherwise minimize how much they owe in taxes through legal means.

For example, they may utilize tax credits and tax deductions to lower the amount of taxes owed. This is legitimate if there is no intentional concealment or misrepresentation.

Some people even use tax-advantaged retirement accounts and work with professionals to minimize their income within the parameters of federal law. This also is legitimate if there is no intent to conceal or misrepresent facts.

Simply put, the line between legal tax avoidance and illegal tax evasion is the intent to defraud and not pay what you owe. You can avoid committing tax evasion by properly filing your annual income tax return free of intentional concealment or misrepresentation of fact.