Tax Avoidance or Tax Evasion – The Difference Can Result in Jail Time

“I’m 80% sure the home interest deduction doesn’t apply to me, but I’m going to take it anyway.”

“I won some money in Vegas, but I ‘forgot’ how much and there is no record.”

“I don’t get a W-2 or 1099 for half of my income, the IRS will never know.”

Tax avoidance?  Not a chance.   Black’s Legal Dictionary, Avoidance of Tax - “the method by which a taxpayer reduces his tax liability without committing fraud.”

In other words, tax avoidance is using all legal means to reduce your tax liability and we all have the right to avoid taxes.

When does tax avoidance reach the level of tax evasion?  Most of the time, just like the above, people know when they are doing something wrong or fraudulent.  Regrettably some folks do not know you can go to jail for tax evasion.  Some folks who have taken part in such schemes have found themselves not only owing hundreds of thousands of dollars to the taxing authorities, both federal and local, but also facing jail time. A good rule of thumb when evaluating such schemes might be, “If it sounds too good to be true, it probably is.”

Some taxpayers participate in obvious tax evasion as a daily practice.

·      Cash transactions that never see the books.

·      Paying employees “off books” to avoid employment taxes

·      Failing to report income with full intent to evade paying taxes

·      Trumping up expenses that have absolutely no basis in reality

·      Keeping two set of books

The result of these evasions can result in significant fines or even jail time.  Two recent convictions turned out badly for the miscreants (from http://www.taxproblemattorneyblog.com):

Horany, a business owner, admitted to underreporting his income by approximately $175,000, which resulted in his underreporting his tax due and owing by over $60,000 in 2007 alone. In total, Horany underreported his tax due by more than $145,000; he was sentenced to 12 months in prison for his actions. Sometimes taxpayers try to convince themselves that the IRS won't go after them because they are "minnows." This case is a warning that it is not necessary to evade millions of dollars in taxes in order to be prosecuted for tax evasion.

Sathre, also a business owner, was a much bigger fish; he pled guilty to charges of tax evasion and was sentenced to 36 months in prison and was ordered to pay $3,113,882 in restitution for willfully evading payment of his taxes for 1995 and 1996. According to the Department of Justice press release, Sathre concealed income from a property he sold, for which he received over $3 million in installment payments. Sathre compounded the problem by sending over $500,000 during 2005 and 2006 to an offshore bank account in the Caribbean, and later wired $900,000 from the sale of another property to the same offshore account in an attempt keep the funds out of the reach of the IRS. In addition, Sathre supplied the Caribbean bank with false declarations and false promissory notes and also claimed he was neither a citizen nor a resident of the United States. Although not mentioned in the press release, one would assume that Sathre also failed to file Foreign Bank Account Reports (FBARs) on TD-F 90-22.1 (now known as FinCEN Form 114). These criminal tax cases (among many others) demonstrate that the IRS takes the issue of underreporting income very seriously and will not hesitate to press for a prison sentence in cases involving tax evasion.

So where should you draw the line. You should take advantage of every possible expense deduction and loophole regarding earnings, but understand that when you go too far, it may cost you dearly in dollars or even a unexpected vacation in the Federal penitentiary.