Many people scramble to file their annual income tax returns in the second week of April every year. Others, realizing that they have waited too long, may file a request for an extension. They then have several months to gather their records, complete the tax return and submit it to the Internal Revenue Service (IRS).
Regardless of whether a particular taxpayer meets the April filing deadline or not, they likely want to minimize how much they have to pay in income taxes. They can achieve that goal by using deductions and credits. However, some people take their attempts to minimize income tax obligations too far and may put themselves at risk of a tax evasion charge or an IRS audit that results in a past-due tax balance.
How can taxpayers determine whether their attempts to reduce their taxes owed constitute tax evasion?
Tax avoidance is legal
The use of deductions, write-offs and credits is a lawful practice utilized by those who want to avoid or minimize their income tax liability. The IRS has rules in place that allow people to write off medical expenses or exclude the income contributed to a 401(k). The use of those tax avoidance strategies is perfectly legal.
In some cases, attempts at avoidance can cross the line and become tax evasion. The difference between tax avoidance and tax evasion often comes down to honesty and intent. Efforts to reduce income tax liability become tax evasion when they involve fraudulent misrepresentation.
Claiming deductions for certain expenses is perfectly legal. Insisting that the monthly date night a taxpayer has with their spouse is a business write-off is not. Similarly, people cannot claim credits for dependents who have begun their own families or who live full-time with another parent who can claim them on their tax return.
Failing to report streams of income can also lead to allegations of tax evasion. Even the failure to disclose high-value assets, including international and digital property, could result in tax controversies.
Individuals accused of tax-related misconduct could face financial consequences and possibly criminal prosecution. Reviewing IRS letters and other documentation with a skilled legal team can help people respond to a serious income tax controversy. With the right support, taxpayers can often handle tax controversies successfully.