I’ve always remembered a saying my tax law professor would have.
He would say “ someway somehow, Uncle Sugar is going to get his money”.
Uncle Sugar was his affectionate way of describing Uncle Sam and the IRS.
But if you are a small business going through an audit, you would probably describe Uncle Sam with much less affectionate words.
Words that kids need to put their hands over their ears.
Tax Evasion is like that family member that nobody likes to claim is part of the family, but they are there, coming to the family reunions and causing drama when you least expect it.
What is Tax Evasion?
The IRS defines tax evasion as the failure to pay or the deliberate underpayment of taxes. Anyone found guilty of tax evasion faces hefty fines, prison time, or both. Let’s take a closer look at what is tax evasion so you know where to draw the line.
Two Types of Tax Evasion
The IRS recognizes two different forms of tax evasion: evasion of assessment and evasion of payment. If a person transfers assets to prevent the IRS from determining their true tax liability, they have attempted to evade assessment. If a person hides their assets after a tax becomes due and owing, an attempt to evade payment has occurred.
Evasion of Assessment
The taxpayer must perform some action that is focused on defeating the assessment of a tax. Requires more than a proof of negligence. An intentional under-reporting qualifies as an attempt to evade.
Evasion of Payment
Affirmative acts to evade payment generally involve concealment of money or assets with which the tax could be paid. Such an act could also take the form of removing the assets from the reach of the IRS, such as in a foreign bank account. Simply failing to pay taxes owed, is not evasion of payment. An example of evasion of payment is concealing assets in a family member’s bank account.
What are the consequences of Tax Evasion?
The consequences of tax Evasion can come in many forms, depending on the crime and severity of the crime.
And I use the word crime, because under the US Tax Code it is a crime, and not a simple infraction.
Depending on the severity, tax Evasion can lead to a severe fine or even jail time.
For example, during the time of Prohibition, the government could not get a case against Al Capone to stick.
Even though they knew he committed all types of crimes from bootlegging, to murder, and everything in between, but they still couldn’t get a federal case to stick.
So what did they do?
They pulled out the good old fashioned tax Evasion charge on him.
The tax Evasion charge was much easier to prove.
Numbers don’t lie. And things weren’t adding up.
If the federal government see a lot of income or the fruits of a lot of income, but that is not reflected correctly on your tax report, then they are going to have an easy time proving that their was tax Evasion going on.
This is what happened to Al Capone. He ended up dying in prison from Syphilis.
There are thousands of cases, maybe lesser known, but demonstrative just the same of the consequences of tax evasion.
Why is it important to avoid Tax Evasion?
This should be an easy question to answer.
Who wants to go to jail?
Raise your hand. I’m sure the Federal Government can find a place for you.
But for us regular folks, jail time is not something we have any plans on enjoying.
Being convicted of tax Invasion will ruin your business, your life, and your family life.
And for what? Saving a few thousand dollars?
Now, I’m not suggesting that you over-pay your taxes.
I’m just saying pay what you owe and not a cent more.
But for some reason for some people, the lure of keeping a few extra dollars is too much to pass up.
They for some reason cannot do an accurate internal cost-benefit analysis that keeps most people from committing tax invasion.
A more recent example is the rapper DMX who not too long ago got out of prison for tax invasion.
Now I’m not trying to bash him because I love DMX.
But why he felt trying to hide a few million from the IRS while he is traveling all over the world doing shows, we will never know.
Maybe he got some bad advice, that led him astray.
For some people, and I’m not saying DMX has this, tax Invasion is almost a compulsion.
Like something they can’t help.
Three Key Ways to Avoid Tax Evasion
Like the movie Fight Club said “ the first rule of fight club is don’t talk about fight club.
The second rule of fight club is don’t talk about fight club, and
The third rule of fight club…
Tax Evasion is kind of one of those things where you know when you are doing it.
Now there is a fine line between tax Invasion and tax avoidance. One is legal the other one is not.
Guess which one it is. Lol
Tax avoidance is legal as you are only trying to pay what you are legally obligated to pay.
Your fair share of taxes, not more than.
But tax Evasion is not paying what you know you owe.
Not paying your fair share.
Now I know that the word “fair share” is a loaded word, it can be used for good and bad.
So we won’t get into what is fair share, or who determines what a fair share is.
Let’s just say that there is a mythological “fair share” of taxes out there. The IRS determines it, and that’s what you are required to pay.
But the key to remember is that the IRS every year adjusts what that “fair share” is.
Tax Invasion is when you intentionally or negligently fail to pay your fair share of taxes.
It’s like the opposite of the Nike mantra “Don’t do it”.