If a taxpayer uses an unlawful strategy to avoid paying taxes legally owed, this is referred to as tax evasion. Tax evasion can come with serious consequences such as a large fine and jail time.

The Difference Between Tax Avoidance and Tax Evasion

Often times, the line between tax avoidance and tax evasion is a fine line. For instance, a taxpayer who has a child under 16 qualifies for a reduction in his or her taxes. Asking for this deduction is legal tax avoidance. However, if a taxpayer claimed that he or she had a dependent under 16 but had no dependent, that would be fraud and an example of tax evasion.

The History of Tax Evasion

Tax evasion has been occurring as long as there were taxes to be paid. Typically, citizens of a country that had an income or value added tax avoided payment by paying off tax officials who would fail to report the evasion. Today, tax evasion is considered to be a major problem in less developed countries where sophisticated collection and reporting systems may be lacking.

In 1972, a research paper was written that examined why individuals would try to evade paying their fair share of taxes. The findings revealed that evasion was higher during times of unemployment and during times of dissatisfaction with government. Evasion rates were also linked to the tax rate itself. Not surprisingly, the rate of tax evasion was also associated with the likelihood of getting caught and the penalties associated.

Notable Examples of Tax Evasion

The most notable example of tax fraud occurred in 1929 and involved Chicago gangster Al Capone. He had been wanted for years on charges of murder and other crimes, but none of the charges resulted in a guilty verdict. However, he was eventually found guilty of tax evasion and spent time in prison.

Wesley Snipes was convicted of failing to file a tax return and had to spend three years in jail in addition to paying millions of dollars in back taxes to the IRS. He reportedly failed to file or pay tax because of his political views.

Many people know Abbott and Costello for their skit Who’s On First. However, most don’t know that the comedy duo was convicted for tax evasion in 1956, which forced them to sell the rights to many of their creative works. They would also be forced to sell much of their personal property as well.

The next time you want to avoid paying your taxes, you may want to think about the consequences of doing so first. You may have to pay back taxes, endure IRS levies of your property and spend time in jail. While you generally have an opportunity to make up for an honest mistake, it is almost always better to file an accurate return the first time.

Tax season is one of scammers’ favorites to gain and abuse the confidence of unwary individuals. Every year sees the emergence of new and creative ways to steal personal information from taxpayers, but knowing a few simple facts goes a long way for identifying what is real and what isn’t.

Basic Tips

The IRS explicitly does not issue phone calls or emails asking for personal information or demanding payments. All communication between the IRS and taxpayers starts with mailed notices, and any communication afterwards will only be to inform individuals of any actions they need to take, not to collect. Scammers will do everything they can to appear legitimate, including fake caller IDs, fraudulent use of the IRS logo, and impersonating agents. Before taking any actions or revealing personal information, taxpayers are advised to verify whom they are speaking to on their own. The more aggressively a phone call or email attempts to gain sensitive information, the more likely it is to be a scam.

Phone Scams

One of the most prevalent scamming methods involves criminals attempting to deceive people over the phone. They will do this by impersonating IRS agents, representatives of charities, or anything else they can use as a pretext to get valuable information from their targets. Pretending to be representatives of an organization people trust, they will use any angle, from using threats of penalties to offering special rewards and opportunities, provided the victim give over their credit card or Social Security numbers. Anyone who presses people for this kind of information is most likely a scammer.

Fraudulent Tax Preparation Services

The information included in every tax return is the responsibility of the taxpayer. However, many individuals use tax preparers to handle the details of their return. Most of these agencies provide excellent services to their clients, but it is important to verify their credentials, policies, and examine their work when it’s done. Tax preparers that make outstanding claims compared to their competitors may try to submit falsified information on the behalf of unknowing taxpayers to make money for themselves. These agents will often base their fee on how big the return is, and inflate a return illegally to increase their pay. Reputable agencies will be happy to display their dedication to educational and ethical standards that guarantee taxpayers the best return they can legally get.

IRS “Dirty Dozen” Tax Scams

Every year, the IRS compiles a list of the most prevalent schemes targetting taxpayers. People who are aware of these scams are more capable of filtering out any attempts by criminals to steal their money and identities, and are also warned to pay attention to the details of their return forms. In addition to phone scams, return preparer fraud, and fake charities, taxpayers should be on the lookout for:

• Phishing: Describes attempts to gain personal information through fake websites and email.
• Identity Theft: Especially common during tax season.
• Offshore Tax Avoidance and Hiding/Falsifying Income with Fake Documents: The IRS is getting better at finding hidden incomes and will act on any discoveries it makes both overseas and domestically.
• Excessive Claims for Fuel Tax Credits: Fuel tax credits are primarily used by farmers and associated businesses and should not be abused.
• Frivolous Tax Arguments: Individuals should not attempt to avoid paying their taxes without very good reasons.

False Return Cases

Tax Return Preparers Intentionally Committing Tax Fraud

I recently noticed a couple of false return cases. The indictments and guilty pleas were a result of tax return preparers intentionally preparing and filing false income tax returns, a form of tax fraud. Internal Revenue Service-Criminal Investigation found the evidence and put it together for the prosecutors. In each of these cases, the preparer faces a maximum of three years in jail.

The key here is to avoid being indicted as an aider and abettor to preparing and filing false returns. The best way to avoid this is to pick your tax return preparer carefully. Be sure that you have someone who is reputable. CPA’s generally have high ethical standards. One is less likely to run into a false preparer in the CPA practice, than one will with tax return services.

Beware the preparer who promises you a refund. If the preparer is good, they will find and maximize a refund. But if a refund is not there, it’s not there and the preparer will not manufacture one.

Typically the false return preparer will insert into the return false deductions. Regardless whether you have a reputable preparer, give yourself some insurance. Take the time to review all of the deductions taken, to see if there is a deduction that is for an unreasonable amount. Also look for a category of expense where an amount has been taken, but you know that you have never spent money under that classification of expense.

False return preparers have on occasion understated income. This is unlikely when your income is declared on a W-2. But if you have a business, false preparers will fiddle with the amount of income reported for the business. They may report income to the extent that you have received Forms 1099, and nothing else. Once again, get yourself some insurance. Examine the amount of income on the return and compare it to your knowledge of your business. Is the number on the return about what you make a month?

All in all, do not become associated with a false return!

The government of our nation provides many services for its citizens, and these services, of course, are not free, and must be funded by an income.  That’s where our tax dollars come into play.  The federal government uses our tax dollars to pay for such goods and services as public schooling, job training, defense funding, Medicare and Medicaid, roads, police and fire protection, etc.  It is the duty of every American to pay their taxes to make it possible for the federal government to keep providing these services and goods that we as citizens rely upon daily.

The majority of citizens do honestly pay taxes on the income they earn.  However, there are those who attempt to cheat the government by tax evasion and tax fraud.  One alleged cheater is a Texas woman, who was arrested for allegedly filing multiple fraudulent tax returns for herself and others and for evading taxes, as well.

United States Attorney Kenneth Magidson announced that Miranda Gore of Houston, Texas, was taken into custody by IRS agents on August 16, and charged with nine counts of willfully aiding and assisting in preparing and presenting false tax returns and two counts of willfully attempting to evade or to defeat her own income tax returns for two years.  In the returns Gore prepared and presented to the IRS, according to the indictment, false business losses and false first time home buyer’s credits were claimed for tax year 2008.  The IRS is also accusing Gore of tax evasion on both her 2008 and 2009 personal income tax returns by claiming first time home buyer credit and underreporting her income.

Should Gore be found guilty of these charges, she could face up to three years in federal prison for each count of preparing a false income tax return for others, as well as a maximum fine of $250,000.  For the two charges of tax evasion, an additional five-year term of imprisonment and another $250,000 fine could be charged.