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Is That Deduction Tax Evasion or Tax Avoidance?

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Posted on December 31, 2018 |

Everyone wants to pay less in taxes. Individuals and companies go to great lengths to devise and employ schemes to lower their tax liabilities. While the vast majority of taxpayers work within the confines of what is allowed by the IRS tax code, there is a line that all taxpayers must take care not to cross: the one between the legitimate practice of tax avoidance and the unlawful practice of tax evasion.

If you find yourself unsure of where that line is drawn, a Boston tax attorney can help.

The Compliance Buck Stops With the Taxpayer

The IRS tax system relies on the idea that taxpayers do the right thing of their own accord. The IRS cannot possibly review tax returns before they are filed to ensure accuracy, and they certainly don’t have the resources to audit every tax return after filing.

Instead, taxpayers are expected to comply with tax laws and regulations on their own. If they are caught failing to meet the government’s expectations of voluntary compliance, they can be hit with back taxes and interest.

Taxpayers who willfully attempt to deceive the government by tax evasion and tax fraud expose themselves to severe sanctions, including hefty penalties and possible prison time.

Tax avoidance, meanwhile, is a legal way to reduce tax liability. It is, therefore, important to know the difference between unlawful tax evasion and perfectly acceptable tax avoidance.

Tax Evasion

People or companies that hide information about their financial affairs and/or purposefully omit relevant facts presented to the Internal Revenue Service in order to deceptively reduce or eliminate their tax burdens are engaging in the illegal practice of tax evasion.

Often, tax evaders will:

  • Declare less income than earned
  • Declare a reduced amounts of business profits
  • Falsely claim individuals as dependents
  • Deduct personal expenses as business expenses
  • Use offshore accounts to hide funds

Sometimes tax evasion is committed in connection with the operation of an illegal enterprise such as gambling. Tax evasion can also be part of other criminal activity such as money laundering. Many tax evaders, however, are just average people who think they can game the system.

Tax Avoidance

Tax avoidance, on the other hand, is a legal mechanism to minimize the amount of taxes that have to be paid. Tax avoidance strategies that are legal under the IRS tax laws could include:

  • Putting money in an IRA or 401K to defer paying taxes
  • Taking tax credits allowed by law
  • Taking tax deductions for legitimate and allowable business expenses
  • Taking tax deductions for legitimate and allowable mortgage interest payments
  • Taking tax deductions for charitable contributions and medical expenses as allowed by law
  • Managing property in a way that minimizes capital gains

How a Boston Tax Attorney Can Help

If you have questions about whether a tax reducing strategy could be evasion rather than avoidance, talk to Boston tax attorney Kevin E. Thorn at Thorn Law Group before you make a potential costly mistake.

If you have already been contacted by federal authorities or if you suspect that you might be under tax fraud investigation, contact our office by calling 617-692-2989 today or scheduling a confidential consultation online.


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