Avoiding Taxes Versus Evading Taxes: What You Need to Know
The U.S. income tax system is based on the idea of voluntary compliance, a sort of honor system that relies on individual taxpayers to report their income freely and voluntarily, calculate their tax liability honestly and correctly, and file a tax return on time.
The IRS does not review or audit every return. It is, therefore, up to you to understand the laws set out in the IRS tax code and make sure your tax filings can be substantiated.
Savvy taxpayers always work to take advantage of every tax reducing technique available. It is up to you as the taxpayer to know whether your returns reflect tax evasion or tax avoidance.
Tax avoidance – as long as it doesn’t run afoul of the tax laws-- is perfectly legal.
Tax evasion, on the other hand, is illegal and can expose you to liabilities and sanctions, including back taxes, interest, severe penalties and even prison.
If you are not sure if certain tax reducing techniques constitute tax avoidance or tax evasion, it is recommended that you talk with a Washington DC tax attorney before filing your returns.
Reducing Taxes Legally
Because there is nothing wrong with using every legitimate means at your disposal to reduce the amount of taxes you are required to pay, using tax avoidance techniques to save money is not only acceptable, it is encouraged.
Successful tax avoidance includes taking all the credits, income adjustments and legal deductions you can under the law. For instance, you might:
- Use pre-tax dollars to fund a retirement account such as a 401K
- Consider taking certain tax credits
- Take mortgage interest deductions
- Take deductions for charitable contributions
- Deduct your medical expenses
- Implement a strategy to lower your capital gains tax rate
- Deduct certain expenses that relate to the operation of your business
It is important to be able to substantiate every tax avoidance technique taken through documentation. If you take deductions that are not legitimate or inflate credits, for example, you are entering the realm of tax evasion.
Reducing Taxes Illegally
Tax evasion, the misrepresentation or hiding of the true state of a person or entity’s financial affairs in order to artificially reduce tax liability, is a form of tax fraud.
Some typical examples of tax evasion include:
- Deducting personal expenses as business expenses
- Failing to declare all of your income, profit, and gains
- Hiding income gained through illegal activities
- Hiding money in offshore accounts
- Claiming more dependents than you are allowed
- Fabricating income and expense records
How a Washington DC Tax Attorney Can Help
If government authorities have initiated contact with you or your business associates, or if you have any reason to suspect that you could be the subject of a tax evasion investigation either now or in the future, you need experienced legal counsel by your side. Washington DC tax attorney Kevin E. Thon at Thorn Law Group will be your first line of defense. Call us at 202-349-4033 or contact us online.