Paying income taxes is a necessity for anyone earning a living in the United States. Most people do their best to minimize how much they need to pay in taxes. Certain tactics, like making charitable contributions right before the end of the year, can diminish someone’s tax liability without violating any rules.
Unfortunately, some of the ways people seek to reduce their income tax obligations might actually violate the law. The three seemingly clever tax tricks below could potentially put someone at risk of accusations of tax evasion.
Choosing not to report income
Many people have at least one secondary stream of income. Whether they use their truck to haul large items for their neighbors occasionally or babysit their relatives’ children for cash, they may feel like they can simply keep the money paid for their services. However, the taxpayers generally need to report any stream of income that generates $400 in revenue or more each year.
Inflating personal deductions
Particularly when someone runs a small business, they may be able to write off a number of expenses that they incur to run or promote their business. This is very tempting to write off a meal with family members as a client’s dinner or to include personal travel receipts along with business travel receipts. However, if such misrepresentations eventually come to light, they could trigger sizable tax penalties and possibly criminal charges. Even honest mistakes, like claiming the children after the divorce when the other parent has primary custody, could lead to claims of tax evasion.
Hiding taxable assets
People have to pay income taxes when they earn their money and then often sales taxes when making purchases. Some people resent needing to pay taxes based on their personal holdings. They may try under-reporting their assets. In some cases, people intentionally move funds into international accounts to avoid reporting them to the government. Those who get caught with unreported taxable assets could face penalties and possible prosecution.
Recognizing when one’s efforts to reduce taxes might actually cross the line and become tax evasion can help people avoid preventable mistakes and more effectively respond to claims that they have mismanaged their taxes.