No one likes paying taxes. Many people pay accountants and tax attorneys a good deal of money to help them determine how to pay less in taxes to the government. If a taxpayer is not careful, it is easy for him or her to do something illegal and be subject to criminal and civil penalties.
When Paying Fewer Taxes Is a Crime
Understanding the difference between tax avoidance and tax evasion is key for those looking to reduce their tax obligations. Tax avoidance is the practice of organizing finances so that the tax obligation is as small as possible. The U.S. Supreme Court stated in Gregory v. Helvering that U.S. citizens have the right to decrease - or eliminate altogether - their tax burdens by taking advantage of existing laws.
In contrast, tax evasion is a form of tax fraud where a taxpayer avoids paying his or her true tax liability using illegal means. In order to convict someone of tax evasion, the Internal Revenue Service must prove that the person had an obligation to pay a tax, the person did not pay the tax, the taxpayer took some sort of affirmative act to avoid paying the tax, and that the taxpayer took the action with the specific intent to evade paying his or her tax obligation. Tax evasion generally involves misrepresenting or underreporting income or assets, inflating deductions, or attempting to hide assets in offshore accounts.
Penalties for Tax Evasion
Tax evasion is subject to both criminal and civil penalties. A person convicted of tax evasion faces up to five years in prison, a fine of up to $100,000 or both. There are further civil penalties for tax evasion, which include not only paying the tax due but interest on the unpaid taxes along with a fine of up to 75 percent of the amount underpaid attributable to illegal activity.
Offshore Voluntary Disclosure Initiative
For those who have assets in offshore accounts and have failed to report them to the I.R.S., there is an opportunity to become current on tax obligations and avoid criminal prosecution by participating in the I.R.S.'s 2011 Offshore Voluntary Disclosure Initiative. Taxpayers have until August 31, 2011 to declare their offshore assets to the I.R.S. under the program. In return for disclosing the assets, the taxpayer will generally avoid criminal prosecution and face a fine of only 25 percent, or in limited cases 12.5 percent, or 5% of the total amount of offshore assets in addition to having to pay back taxes on the assets.
While it is permissible to structure finances so that a person pays as few taxes as possible, it is illegal to use misrepresentation to avoid paying taxes that the law requires. If you have a question about whether a practice is tax avoidance or tax evasion, do not hesitate to contact an experienced tax attorney who can help you navigate the I.R.S.'s regulatory maze.
