Tax evasion in the United States is more common than you might think. However, most people don’t know that it is a serious crime. This article will take a comprehensive look at everything you need to know about tax evasion, including what it is and the different types.
What is tax evasion?
Tax evasion can be defined as any unlawful act of minimizing or avoiding tax liability. It is an illegal attempt to evade tax payment or intensionally avoid an assessment. It is a crime that can lead to imprisonment or heavy fines.
The IRS leverages several tools to catch tax evaders. These include audits, data mining software, and information-sharing arrangements with various countries.
Understanding the difference between tax avoidance and tax evasion
Although tax evasion and tax avoidance sound similar, the two scenarios are different. For starters, tax avoidance is minimizing tax liability within the tax code framework. Tax avoidance is legal because it involves using tax shelters and tax deductions to reduce your taxable income.
On the other hand, tax evasion is deliberately failing to pay your taxes through various means, including hiding assets offshore, claiming excessive deductions, and underreporting income.
Different types of tax evasion
Some individuals evade taxes using different methods. The most common ways include not paying income taxes entirely, underreporting wages, claiming fake deductions, and hiding assets. Below is an in-depth look at these typical methods of tax evasion.
Underreporting income is among the most common forms of tax evasion. These tax evaders report less income or conceal income from the IRS in an attempt to pay lower taxes. It is often done by omitting taxable income when filing.
Some people hide assets to lower their taxable income. Oftentimes, these individuals transfer different assets to friends and family members, thus hiding them from the IRS. Others go a step further by opening offshore accounts and placing crucial assets in trusts.
Claiming false deductions
Other individuals try to evade taxes by claiming false deductions on their tax filings. This form of evasion includes undue deductions, like nonexistent business expenses. It is often done together with underreporting income.
The consequences of tax evasion
Tax evasion is illegal and can result in imprisonment or substantial fines. The severity of penalties comes down to the seriousness of the crime, ranging from thousands to millions of dollars and even five years of imprisonment.