Paying taxes is as American as lighting fireworks on the 4th of July celebrating the birth of our country birth or thanking a vet for their service on Veteran’s Day. You might enjoy the time off from work to celebrate those holidays but I’m sure you don’t enjoy opening your wallet for Uncle Sam. As you may or may not know, your tax dollars stretch far and wide paying for things like national defense, health care, veteran benefits, and education and training just to name a few so short changing Uncle Sam is doing a disservice to your fellow neighbor and country.
After every festive December holidays come to an end and we ring in another year, it’s time for us to start thinking about preparing and filing our income tax returns. For some, collecting W2’s and other tax forms means a nice check from the government. Others file only to have to open their wallets up even more to pay the government. And, there are others who simply feel compelled to lie, cheat, and steal from our friends at the IRS.
It’s important to know and remember that the IRS probably knows you better than you know yourself. Honest is the best policy. Perhaps that might sound a bit cliché but that will definitely keep you out of limelight and help avoid the IRS from coming after you. Here, we’ll talk about three very important tax terms that will keep you on Uncle Sam’s good side.
Tax Avoidance
Simply put, this is where all of your tax advice from your fellow Certified Public Accountant or Tax Attorney should fall into. Should you receive advice that’s shady or too good to be true must be avoided at every juncture. Tax Avoidance basically is to minimize your tax liability as much as possible within the boundaries of the law. The IRS establishes law, rules, and regulations that dictate personal exemption limits for a spouse and children, how much interest you can deduct on your second home, and what kind of medical expenses you can and cannot deduct. CPAs, accountants, and tax attorneys will know these rules inside and out and how to bend them legally to help you save money in taxes.
Tax Evasion
While tax avoidance can be viewed as a legal practice, tax evasion is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed. Now, tax evasion doesn’t just have to be at the federal level for it to be illegal, it also extends to self-employment taxes, local, state, and excises taxes so every sector is covered extensively.
Now, the definition of tax evasion can be very board. Let’s run through some examples so you can enhance your comprehension and protect yourself:
- Underreporting Income – say you owe a business and you decide to hide sales receipts from a decent-sized or even a small client. Since you’re sheltering that income from the government you’re committing a crime.
- Overstating Expenses and Deductions – if you ever think about claiming charitable contributions than you contributed to your local church or claim an exemption you knowingly shouldn’t have.
- Hiding Money – what if you’re an employee who collects tips or a teacher who tutors on the side? If you record less than what you earned or fail to claim the money at all then you’re committing a serious crime.
It’s important to remember that tax evasion is a subcategory of tax fraud. You might hear this term as well. The core distinguishing feature of tax fraud is a taxpayer’s intent to defraud the government by not paying taxes that he knows are lawfully due. The terms are virtually interchangeable and spell disaster for you if you try to weasel your way out of paying taxes.
Dealing with Mistakes
What if my eagle-eyed accountant or I make a mistake on our tax return? For starters, you simply cannot state that a mistake and tax fraud or evasion is the same thing. They aren’t. A mistake, as you know, is an error that you make that’s unintentional. As you’ve just learned, tax evasion is knowingly and intentionally avoiding paying taxes. If a mistake is made on your tax return, he or she would not face fraudulent or evasion charges unless the IRS can prove that the underpayment or error was intentional.
If a mistake is discovered either by your own doing or by a tax preparer, it’s important to bring the issue up to your accountant immediately for discussion and resubmitting the proper documentation to update and correct your tax return.