Understanding Tax Evasion: 5 Frequently Asked Questions

No one likes paying taxes. But while they can be complex, taxes are a major part of the American way of life. They are a vital aspect of nation building and help support many organizations and programs that citizens rely on at a local, state, and federal level. Taxes help support social service programs, public health and education, national defense programs and much more.

Despite the collective headache filing taxes often gives many people when April rolls around, it’s important to pay taxes accurately and on time. However, not everyone does this and some engage in what is known as tax evasion. To dig deeper into tax evasion, how it occurs, and the possible outcomes, David Stewart reviews some commonly asked questions on the subject.

tax evasion concept

What Is Tax Evasion?

Tax evasion is defined as any action that is meant to defraud the IRS. It occurs when an individual or a corporation knowingly misrepresents their income to the IRS in an effort to avoid paying taxes. Misrepresentation can include underreporting yearly income, hiding taxable money, and transferring income to offshore accounts.

What are the Types of Tax Evasion?

The main types of tax evasion include personal income tax evasion, business tax evasion, and employment tax evasion. Personal income tax evasion occurs when an individual falsely reports their income. Business tax evasion occurs when a business owner underreports income, exaggerates the amount of deductions, claims false deductions, claims personal expenses as business expenses or hides assets or income. Employment tax evasion involves not paying employment taxes, falsely reporting payroll and employment leasing, among other things.

When can the IRS Charge You with Tax Evasion?

The IRS can charge you at any time for tax evasion if they have grounds to conclude that you have committed fraudulent activity. To be criminally convicted of tax evasion, the IRS must prove that unpaid liability exists and that you hid taxable income to avoided payment.

What are the Punishments for Tax Evasion?

If found guilty of tax evasion, several punishments can result, including the following:

  • Fines
  • Civil penalties
  • Imprisonment

Should I Consult with a Lawyer If I Am Accused of Tax Evasion?

If you have been accused of tax evasion, you should consult with a tax attorney immediately to determine your rights and the best course of action.

How Tax Evasion Can Affect an Entire Nation

For the past few months, the debt crisis in Greece has been in the news a lot as the European Union struggles to work out a new bailout plan with the beleaguered country and keep it in the Eurozone. There are a number of reasons why Greece has gotten to this point, but one that may be overlooked is tax evasion. Greece’s creditors have made it clear that Greece must do a better job of collecting on taxes in order to receive any more bailout money. According to a blog post in Bankrate about tax evasion across the world, Greece’s wealthy have been notorious in the past for not reporting all of their earnings. This has quickly added up to the point where Greece finds itself in a major debt.

However, if you think that this is just a Greece problem, think again. Did you know that in the last IRS estimate back in 2006, the IRS said that there is a tax gap of close to $400 billion in the United States? The majority of this difference in taxes owed and taxes paid was due to underreported earnings – essentially tax evasion. David Stewart has dealt with accusations of tax evasion, so he can attest that tax evasion is a very serious issue. It has far-reaching consequences, like what is going on with Greece. It could also have very personal consequences.

calculator handcuffs

A tax evasion charge can result in a number of unfavorable outcomes, including fines and even jail time. The amount of money you have and your status don’t matter either. There have been a number of high-profile individuals who have jailed due to tax evasion, including Martha Stewart and Wesley Snipes. A large tax gap could cause the IRS to become more active in its pursuit of tax evaders as $400 billion is a lot of money. You may not want to want to pay your taxes, but you certainly don’t want to deal with the consequences. Greece will have to get tougher with its tax collection rate, and the United States may have to as well. Therefore, just pay your taxes.


Tips for Avoiding Tax Troubles

Let’s face it: filing taxes can be a tricky business. There are so many forms, options, deductions, write-offs, and the like to keep in mind that it’s easy to make a mistake and get in trouble with the law. One minor mistake can result in being accused of tax evasion or fraud, like David Stewart. However, more often than not, those accused of this do not intentionally lie about or cheat on taxes. Rather, they made minor mistakes unknowingly that caused them a lot of trouble in the long run. The good news is that these mistakes could all be avoided with some careful planning. Here are some tips for avoiding tax troubles:

tax binder and calculator

1.  Organize your finances – The more organized your finances are, the better. Keep a record of all of your receipts and expenses throughout the year. Be sure to separate personal purchases from business ones. You may want to use some apps or tools such as Shoeboxed to keep track of all of your receipts. Be sure to make copies of receipts for big expenses, too. And it always pays to have a backup just in case you lose the original receipt.

2.  Ask questions – This may be one of the easiest and most important ways to avoid tax trouble. Ask questions about anything you don’t understand. Ask your employer which business expenses might be tax deductible. Check with human resources about what you should claim on your taxes and why. Ask your tax preparer what different terminology means and be sure to fill out each and every area of your tax forms as accurately as possible. Remember, there is no such thing as a stupid question – one answer could make all the difference in the world when it comes to filing taxes.

3.  Consider hiring an accountant – Sure, hiring an accountant may cost you some money up front, but it can help you tremendously in the long run. You should especially consider an accountant if you are self-employed or have had a significant change in your income over the last year. Even if you normally do your own taxes, an accountant can double check all of your numbers for accuracy and ensure that you are claiming the correct amounts. Simply put, an accountant can protect you from getting into any tax trouble down the line.

Tax fraud and tax evasion are serious crimes that can really ruin the lives of people accused of them. Job loss, possible jail time, and a damaged reputation are just some of the negative consequences of tax evasion. By following these three tips, you can increase the accuracy of your tax forms and reduce your risk of making costly errors.