There’s a big difference between “tax avoidance” and “tax evasion.” Simply put, tax avoidance relies on legitimate strategies that may be used to reduce your income tax liability. For instance, you might take steps to increase certain personal deductions or postpone taxable investment income at the end of year. This is perfectly legal.
Conversely, tax evasion is illegal. Tax evasion is the practice of misrepresenting income or deductions or falsifying records or failing to file a return. It’s a common complaint by taxpayers around election time that requiring them to file tax returns or pay taxes is unconstitutional.
If you do the crime, however, you must do the time, as shown in a new case involving an attorney (Carnes, DC – Mo., 22-00282-CR-W-HFS, 9/3/24)
Basic premise: The IRS provides a number of different penalties for offenses such as failure to file a return or negligence. These penalties are added to the back taxes already due. In some instances, the penalty is just a slap on the wrist. However, if you’re guilty of tax evasion or a fraud, the IRS may prosecute you and cart you off to prison.
The maximum jail time is five years plus you may have to pay a $100,00 fine. And that doesn’t mean you can’t be convicted of civil fraud, too. This could result in a penalty of up to 75% of the tax that is due.
Some taxpayers try to hide behind their professional licensing or use a position of authority to circumvent tax payments.
Facts of the new case: The taxpayer, an attorney practicing in Missouri, was required to file state income tax returns and state income taxes. Missouri state law also requires all individuals applying for or renewing state licenses to have paid all state income taxes and have filed state tax returns for the prior three years. Over a series of several years, the taxpayer neglected to do this and thus the state filed liens against him, which were subsequently removed upon payment.
Similarly, the taxpayer paid no federal income tax or filed any federal income tax returns for the tax years spanning 2006 through 2011.
In his efforts to evade tax liability, the taxpayer reputedly committed multiple fraudulent acts, including the following:
- Moving income into his attorney trust accounts to prevent the IRS from imposing levies against the accounts.
- Commingling more than $230,000 in fees and other income into the attorney trust accounts.
- Withdrawing cash from the attorney trust accounts that he used to pay personal and business expenses.
- Using cash withdrawn from these accounts for personal gambling activities and receiving taxable income from those activities.
The taxpayer seemed to try virtually every legal gambit he could, including making a motion to have his case go to a jury trial and claiming that the statute of limitations had expired, but the courts refused to go along. Accordingly, the taxpayer was held guilty of tax evasion and is subject to imprisonment and the fine.
Lesson to be learned: You don’t have to pay more in taxes than what you rightfully owe but pay what you’re legally required to.
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Tags: Income Tax, IRS, State and Local Taxes, Taxes
