Most individuals and businesses have income tax obligations. It is common practice to try to minimize income taxes. There are an assortment of different tax avoidance strategies that are perfectly legal. People make pre-tax contributions to retirement savings accounts. They make charitable donations throughout the year.
They may hire an accountant who takes advantage of the nuance in tax law to help them reduce how much they owe when they file their annual income tax return. All of those strategies are theoretically legal. However, some taxpayers cross the line and commit acts of tax evasion in their attempts to minimize what they pay the Internal Revenue Service (IRS).
Allegations of tax evasion can lead to financial consequences and sometimes even federal prosecution. What are some of the more common ways in which people may unintentionally commit tax evasion?
1. Claiming inappropriate credits or deductions
Self-employed professionals and small business owners are somewhat notorious for taking liberties with deductions. Maybe they purchased a jet ski and then tried to claim it as a business vehicle. Perhaps they take their spouse out for dinner and try to write it off as a business expense.
Some people even misrepresent the number of dependents that they have in order to reduce their income tax obligations. Those actions can constitute tax evasion and may draw the attention of the IRS after an individual files an income tax return.
2. Underreporting income
Maybe an individual has a side hustle where they resell items that they find at garage sales online. Perhaps they rent a property to someone who pays cash or have investments that generate revenue. The decision not to report alternate streams of income can constitute tax evasion if an individual earns $400 or more from those endeavors.
3. Hiding valuable assets
The failure to disclose real property, financial accounts, business holdings and other international assets can also potentially constitute tax evasion. The IRS now also actively looks for digital resources and may hold people accountable for misrepresenting what digital assets they own. Individuals generally need to account for all valuable property, including international and digital assets, when filing an income tax return.
Any intentional misrepresentation of personal financial circumstances can lead to claims of tax evasion. However, mistakes and misunderstandings can also look like tax evasion to the wrong person. Reviewing recent tax returns and letters from the IRS may help those involved in a tax controversy explore their options.