In prior posts, we highlighted the difference between an honest mistake that results in the incorrect amount of taxes paid, and outright fraud where a taxpayer affirmatively tries to avoid paying taxes. Indeed, it is easy to point out the difference between fraud and mistakes in the abstract, but what defenses are actually available when the IRS thinks that you cheated on your taxes?
This post will briefly describe two important defenses.
Living off of savings – There’s not law preventing a person from using their savings account to fund their lifestyle. There are many situations where a person will live off of money saved. The IRS is only concerned with people earning incomes and not reporting it to avoid taxes. So while the IRS may be suspicious about people who hold inordinate amounts of money at hand instead of putting it in interest bearing accounts, it is perfectly legal to use savings as a slush fund.
Using non-taxable income – Another defense against fraud allegations involves the use of non-taxable income sources to pay for living expenses. For instance, college students and graduate students routinely live on student loans. This is not considered income given that is must be paid back with interest. While it is not common, some live off of money received from gifts and inheritances. The common denominator is that these sources are considered non-taxable income.
If you have additional questions about defending against tax fraud charges, an experienced tax attorney can advise you.
The preceding is presented for informational purposes only.