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The difference between tax avoidance and tax fraud

No one wants to pay taxes. But some people seek creative approaches to lower the amount that they owe. The problem is that many cross the fine line that separates tax avoidance and tax fraud.

When does nonpayment or underpayment of a tax bill become criminal? To start this discussion, let's turn directly to the IRS to look at the definition of each term:

  • Tax Avoidance: Actions designed to limit the amount of tax owed
  • Tax Evasion: Deliberate nonpayment or underpayment of taxes owed

The rest of this post will provide examples and discuss willfulness.

    Tax avoidance occurs before any taxes are actually owed. You make professional decisions that will help you avoid an overwhelming tax bill from the start. This is often done by meticulously tracking expenses so that you can file as many legal deductions as possible, or you may purchase specific cars or appliances because they come with special tax incentives.

    This is perfectly legal as long as you honestly report all of your income, you only claim valid deductions, and your taxes are filed in a timely manner.

    Crossing the line

    In order to prove tax fraud, the government must prove that you were aware of your duty to report all income earned or pay outstanding taxes within a certain time frame, but you willfully chose not to do so. There are several ways you may open yourself to criminal charges:

    • Refusing to report all of your earned income
    • Failing to file your tax return
    • Claiming deductions you aren't qualified to receive or using other tax-avoidance strategies dishonestly The willful requirement is a higher burden on the prosecution and requires some evidence that conduct was intentional.

    For example, let's say that you worked as a contractor for a tech firm or in construction and were paid in cash each week. You filed your taxes at the end of the year without reporting any of that income. When your the firm files duplicate 1099s with the IRS that show the amount it paid you, the IRS will have questions. An audit might be the first step. If evidence tends to show willful attempts to hide income or a deliberate scheme to avoid paying taxes, the case could be referred for criminal charges.

    Do accidents happen?

    Tax laws do account for the fact that people make mistakes, especially in regards to complicated laws that even trained accountants sometimes find confusing. If you make a legitimate mistake that leads to tax fraud charges, an experienced tax attorney can help you prepare a strong defense. You must take the charges seriously and obtain representation quickly because a conviction for tax evasion can easily change the course of your life.

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