The IRS reported that only around 17 percent of all taxpayers fail to comply with tax code, and that about three-quarters of those in non-compliance are individuals, not corporate entities. This means the majority of errors on tax forms each year are being made by people who have no background in tax law or accounting.
Shocking, right? After all, tax code is incredibly complex. It can be difficult to decipher even if you do have a finance degree!
Thankfully, the IRS understands this, and most people who make genuine mistakes are not charged with crimes. However, that’s not always the case…
If you’ve found yourself subject to an audit and are worried about the possibility of a criminal investigation, a skilled Texas defense attorney will be able to review your returns and any correspondence you have received from the IRS in order to provide advice on the best course of action.
In the meantime, this post looks at the difference between tax avoidance and tax evasion. We’re going to cover when not paying your taxes is not okay and how the IRS determines whether any errors in your filing are a simple mistake or a serious crime, then we’ll share a few common scenarios in which taxpayers may accidentally commit fraud.
Avoidance vs. Evasion
Did you know that most U.S. citizens did not pay income taxes at all until the government needed to raise funds to support our efforts in World War II during the 1940s?
Tax avoidance is the process of taking deductions and credits when preparing your taxes in order to pay no more than what is required by tax law. Avoidance is perfectly legal. An entire industry has been built around the concept, in fact.
Beginning in January of each new year, we see a whole new cache of videos streaming from every big-box tax prep firm on the block. They’re all working to convince you that they can get you the most money back on your tax return in the shortest amount of time and for the least amount of money.
Evasion, on the other hand, is when you willfully do not pay tax amounts that are owed according to current tax law. In other words, you earned enough income that you owe taxes, but you do not pay them for some reason or another. When you evade your taxes, you are committing a crime, and can be subject to hefty penalties, fines, and in some cases, even jail time.
Fraudulent Actions vs. Negligent Actions Where Taxes are Concerned
Tax fraud occurs when a taxpayer willfully and intentionally falsifies information on their return in order to misrepresent their total tax liability. Prosecutors must prove an individual both owed the tax in question and that they had fraudulent intent in order to secure a conviction.
Although tax fraud is considered a white-collar crime because it is financial in nature and does not typically involve any type of violent behavior, charges of tax evasion are still very serious business. Those who attempt to evade paying their taxes on purpose can face federal crime charges carrying jail sentences of up to five years and penalties reaching as high as $100,000.
If you feel you have been wrongly accused of intending to commit fraud, it is important you seek professional advice. A knowledgeable Tarrant County criminal attorney will work to show that your situation involves tax negligence rather than tax fraud.
Tax negligence is defined by law as a failure to make a reasonable attempt to comply with tax laws. When careless errors occur, but signs of fraud are absent, the IRS usually assumes it was an honest mistake, not willful tax evasion.
At this point, your auditor will classify the mistake as negligence. Depending on the situation, you may still be fined the standard (and fairly steep) penalty of 20% of any underpayment.
Factors most auditors consider when deciding whether to apply the penalty include: a) whether you have made the same mistakes on previous returns, b) if you have kept and provided adequate records, and c) when you have a reasonable explanation for any mistake.
When you can prove you made a reasonable attempt to file an accurate tax return, the IRS usually waves the negligence penalty.
Here are some of the most common ways people accidentally commit fraud on their taxes:
- Filing a return with missing or incorrect information
- Incorrectly claiming tax credits
- Abusing Tax Shelters
- Claiming the wrong deductions or claiming false deductions
- Taking inflated deductions
- Failing to report income or under-reporting income
- Falling victim to tax preparer fraud
If you are preparing your taxes yourself, take your time and make sure you understand every line – especially with the huge tax law changes taking place this year. If you are hiring someone, be sure to use a reputable professional. Don’t let your simple filing mistake become a serious tax crime.
About the Author:
After getting his Juris Doctor from the University of Houston Law Center, Jeff Hampton began practicing criminal law in Texas in 2005. Before becoming a defense attorney, he worked as a prosecutor for the Tarrant County District Attorney’s Office – experience he uses to anticipate and cast doubt on the arguments that will be used against his clients. Over the course of his career, he has helped countless Texans protect their rights and get the best possible outcome in their criminal cases. His skill has earned him recognition from the National Trial Lawyers (Top 100 Trial Lawyers) and Avvo (Top Attorney in Criminal Defense, Top Attorney in DUI & DWI, 10/10 Superb Rating), and he is Lead Counsel rated.