Tax Avoidance or Tax Evasion - a Maryland Tax Attorney Weighs In

No one wants to pay taxes. Still, the payment of income taxes, employment taxes, sales tax, and other taxes is required by law. If you fail to pay federal income tax or other taxes, you could be subject to fines and other penalties.

However, individuals and businesses can legally reduce the tax they owe by taking advantage of the tax credits and legal loopholes in the tax code. Companies and people run into tax problems when they do not know the difference between tax evasion and tax avoidance. A Maryland tax attorney can help.

Tax Evasion or Tax Avoidance?

The mutual goals of tax evasion and tax avoidance is to pay fewer taxes. The difference between the two actions is one is illegal, and the other is legal. One can result in prison sentences, and the other can result in lower taxes.

Tax evasion is the intentional failure to pay federal taxes owed to the government. A company or an individual may be guilty of tax evasion if they deliberately underpay their taxes. Evading taxes involves concealing income from tax authorities, intentionally misrepresenting income or deductions, and other forms of tax fraud. Tax evasion is illegal and may result in jail time.

On the other hand, tax avoidance is a legal way to avoid taxes. According to the Internal Revenue Service, tax avoidance is taking lawful actions to lessen tax liability to maximize after-tax income. The taxpayer does not attempt to evade taxes. Instead, they use legal methods allowed by the tax code to minimize the money they must pay in income taxes.

Examples of Tax Evasion

Taxpayers who do not want to pay a high tax bill intentionally hide income so they need not report the income on their tax return. They may also engage in other wrongdoing to reduce their taxes. There are many ways to avoid reporting income for a tax year.

Examples of tax evasion include:

·       Keeping two sets of books and records

·       Not reporting cash income

·       Failing to report all income or underreporting income

·       Making false entries in accounting records

·       Claiming false deductions

·       Overstating deductions

·       Falsifying income records or destroying records

·       Claiming business expenses that do not exist

·       Changing invoices, receipts, and other tax records

·       Concealing overseas income

·       Paying household employees and nannies under the table

·       Companies misclassifying employees as independent contractors

Failing to file tax returns and deliberately underpaying taxes are also examples of tax evasion and tax fraud.

Intent vs. Mistakes and Errors

Tax laws are complex and preparing a tax return is a challenge. Mistakes happen every day. A mathematical mistake results in a larger refund or a lower tax bill. A taxpayer claims a credit or deduction because they did not understand the tax code. They may overlook small sources of income, such as interest paid on a checking account. The person did not intend to evade taxes. They made a mistake or error because they were not diligent or did not understand the tax laws.

Tax evasion is a willful act. The person intends to get out of paying taxes. They engage in intentional acts of concealment, lying, taking frivolous positions regarding the interpretation of tax laws, and fraud. They falsify documents or hide income.

The IRS follows standard procedures when it discovers a discrepancy or mistake. It may request additional information or audit the return. If the IRS decides that a taxpayer made a mistake, it may impose civil penalties and interest. Without first proving a taxpayer’s intent to commit a crime, the IRS cannot assess criminal penalties.

Potential Penalties for Tax Evasion

The punishment for tax evasion can be severe. A taxpayer could be charged with a felony for evading taxes.

Potential penalties for tax evasion include:

·       Lengthy prison sentences, such as five years in prison for one count of tax evasion

·       Fines up to $250,000 for individuals and $500,000 for corporations

·       Payment of the taxes that should have been paid

·       The cost of prosecuting the cases

·       Probation for one year or longer

There could be other consequences of tax evasion. The IRS could garnish Social Security benefits for back taxes. The IRS could also place a tax lien on the taxpayer’s property. Sometimes, the IRS could seize assets, including real estate and financial accounts.

Individuals convicted of tax evasion have a criminal record. Felony convictions could make it more difficult to find work or rent a home. Felonies also result in losing some civil rights.

Legal Methods of Reducing Tax Liability

The tax code provides legal ways for taxpayers to minimize taxes. All taxpayers, including individuals, corporations, or small businesses, can take advantage of legal methods to reduce taxes.

Ways For Individuals To Reduce Taxes

Structuring your finances to minimize taxes is tax avoidance. Individuals can lower their taxes by funding tax-advantaged retirement accounts, Health Savings Accounts, and Flexible Spending Accounts.

Other tax deductions and tax credits individuals may take include but are not limited to:

·       Medical expenses

·       Charitable contributions

·       Unreimbursed business expenses

·       Student loan interest

·       Teacher educational expenses

·       Earned Income Credit

·       Adoption Credit

·       Child Tax Credit

·       Child and Dependent Care Credit

·       Lifetime Learning Credit

·       Business losses

Keeping detailed records is essential. You must have proof of the deduction or credit. Otherwise, the IRS could allege you were evading taxes instead of avoiding taxes.

Consulting a tax attorney can also benefit individuals, especially high-net-worth taxpayers. There could be several tax avoidance strategies that could lower taxes significantly.

Ways For Businesses To Reduce Taxes

Corporations and small businesses can also take advantage of numerous credits and deductions to lower tax liability. Business taxes include several obligations, such as income taxes, employment taxes, and collecting sales tax.

Business owners need to set up detailed books and records to track income and expenses. They also need procedures for collecting and storing evidence of income and expenses.

Tax preparation and tax planning are also crucial for avoiding taxes. Deciding when and to what extent to claim business deductions can make a significant difference in tax liability. For example, accelerating depreciation for some business assets may be beneficial in higher income years.

Another option to avoid taxes is to add employee benefits instead of raises. The company does not raise employment taxes and might receive other tax advantages.

Businesses can also avoid tax debt by choosing the best structure for their company. A small business owner may begin with an LLC or an S Corporation. However, as the company grows, the company receives more tax advantages as a C Corporation.

Keep Current with Changes in Tax Laws

Another way to lower tax liability and avoid being accused of tax evasion is to ensure you understand changes in tax laws. Tax laws change frequently. The changes could affect your tax liability by changing deductions and credits.

Companies and individuals can benefit from consulting a tax lawyer. A tax attorney understands the current tax laws and how to use those tax laws to the taxpayer’s advantage.

Contact a Maryland Tax Attorney for More Information

Tax matters can be complicated. It is easy to make mistakes or errors that could cause serious tax problems. If you receive a notice from the IRS regarding a mistake or audit, understand your legal rights and obligations.

If you have questions about tax matters, including tax avoidance and tax evasion, contact our Maryland tax lawyer to discuss your specific tax question. We are here to help you with all matters related to taxes.