Subtle But Important Differences Between Avoidance and Evasion

Accusations of tax evasion are very serious. Not only do they come with the social stigma associated with the word “evasion,” wherein others may think you were attempting to game the system to get out of paying your fair share, but they also could result in serious criminal penalties like:

• Imprisonment of up to five years
• Fines
• Payment of back taxes plus penalties and interest
• Increased audit risk for years to come
• Costs associated with the prosecution

A huge issue – and a hurdle for the prosecution to overcome when bringing such cases – is that, in many instances, the taxpayers had no intent to evade tax collection. Instead, they assumed they were relying on lawful tax avoidance strategies, and taking advantage of favorable code provisions to lower their overall tax indebtedness.

The tax code contains hundreds of thousands of pages and millions of words, much of which is conceivably open to some level of interpretation. If you are facing investigation for tax crimes like fraud or evasion, it is very important to know the difference between criminal activity and strategic tax avoidance or negligent/accidental underpayment.

Indicators of evasion

There is no hard and fast set of circumstances or indicators that always signal that a taxpayer is likely evading instead of just using recognized strategies to avoid additional tax liability.

For example, a taxpayer might, on the advice of a tax preparer or financial planner, take a deduction or credit that turned out to later be inapplicable. This does not necessarily make the taxpayer guilty of evasion. A strong argument exists that the person’s intent was innocent, even if it did result in an under-reporting of income or an underpayment of tax indebtedness. The IRS will likely consider that intent, and while they may still penalize the taxpayer a portion (usually 20 percent or less) of the underpayment and require payment of any otherwise existing tax liability, no criminal charges will result.

Some common fact patterns do often show up in evasion cases, though, and they can be persuasive when making a determination between criminal tax evasion and proper tax avoidance. These include:

• Concealing income transfers
• Maintaining two sets of financial information (with differing entries on each; there’s nothing illegal about simply having a back-up)
• Falsifying tax documents, receipts or checks
• Wrongfully claiming personal expenses as business expenditures
• Willfully using the wrong social security number of taxpayer identification number

As you can see, there is, in many cases, a thin line between avoidance and evasion. Any argument you make on your behalf to the IRS or other tax authorities needs to be factual, persuasive and correct. If you find yourself being investigated for – or charged with – tax evasion, fraud or other criminal tax charges, contact an experienced tax attorney as soon as possible.