In the endeavor to keep their earnings, individuals and companies resort to a number of ways to decrease their tax liabilities. Some of these are legal, some are not. It is tempting for many to cross the line, however, if uncovered, the crime will cost the person or business charged with it a lot. In the newest article, experienced criminal tax lawyers from a New York City based law firm Joseph Potashnik and Associates, PC speak on tax fraud and its types, explain how tax avoidance is different from evasion and tell about the possible penalties.
Tax Fraud: Definition, Forms Of Fraud
Every private and corporate taxpayer is legally required to file returns to the Internal Revenue Service, and anyone who either fails to do it or does it improperly commits a crime and therefore is subject to criminal prosecution.
So, tax fraud and evasion are crimes committed intentionally either by an individual or a business entity and they constitute falsification of return information for the purpose of reducing liability. Some people might wonder whether there is a difference between tax fraud and evasion. Well, in some countries’ legislative systems, these two terms are different: tax evasion is unintentional and still it is punished by administrative and civil penalties, whereas tax fraud is a criminal offense. However, in the United States the difference is subtle, and both terms can be used to describe an illegal practice of avoiding paying one’s full liability and thus can lead to criminal charges. A lot of related prosecutions in NYC start as investigations of NYS Department of Taxation and Finance, and in order to prevent the case from being passed to the court, it is necessary for the person or business under investigation to seek legal counsel from a skillful tax fraud lawyer.
Some of the common reasons for prosecutions include:
- failure to report full income;
- filing false returns;
- overstating expenses and claiming false deductions;
- claiming personal expenses as business expenses;
- failure to file returns;
- implementing illegal practices, such as paying employees in cash.
Difference Between Tax Avoidance and Evasion
There are legal ways a taxpayer can reduce their liabilities. These constitute tax avoidance, which is not a crime, as opposed to evasion, which is prosecuted both on the federal and state levels. However, one should be careful about using only legitimate methods approved by the IRS (Internal Revenue Service).
Tax Avoidance Examples
Basically, all U.S. citizens and business entities engage in tax avoidance. Its methods include making contributions to retirement plans and charitable organizations, as these sums are deductions and thus allow the person or organization to legitimately reduce their tax bills. For large corporations, legal methods include acquisition or mergers with companies based in other countries with lower corporate tax rates and thus changing the corporation’s headquarters. Though the ethical aspect of this method remains under discussion, technically this is legal.
The U.S. tax code is ever-evolving, and hundreds of changes are introduced every year. And although a lot of them are aimed at simplifying the regulations, it takes time for companies and individuals to make the changes out and adopt them, which gives way to a large number of audits, investigations and prosecutions.
The Criminal Investigations Division of the Internal Revenue Service is authorized to initiate audits and criminal investigations, which put the person or entity under investigation at risk of criminal prosecution. Not only regular taxpayers are targeted by the IRS-CI, but also business professionals, such as tax preparers, accountants and attorneys. Depending on severity of the crime, the person found guilty will face large fines, jail time or both. Here is a short overview of some sections of the Internal Revenue Code:
- Section 7201 provides that a person found guilty of knowingly attempting to evade or defeat taxes may serve up to 5 years of jail time, pay a fine of up to 250,000 USD (500,000 USD for corporate taxpayers), or both.
- Section 7202 provides that a person charged with knowingly failing to collect, account for and pay over a tax, may face up to 5 years of imprisonment, a fine of up to 250,000 USD (500,000 USD for corporate taxpayers), or both.
- Section 7203 provides that a person found guilty of knowingly failing to pay a tax, make returns, keep records or provide information, may face up to a year of jail time, up to 100,000 USD (200,000 USD for corporate taxpayers) or both.
As you see, these are serious crimes, and in some cases they may involve other felonies, such as identity theft, money laundering and others, which aggravate the case and may lead to decades of jail time and millions of dollars in fines. At the same time, audits and investigations may last for months. And even though they might not eventually prove any deficiency, they may cost the investigated person or organization their reputation and employment, not to mention the many hours spent on dealing with the authorities and the stress it causes. Therefore, it is necessary to start resolving the issue as soon as possible and hire an expert IRS tax attorney at once.
Benefits of Turning to Joseph Potashnik and Associates PC for Legal Help
Our firm’s tax fraud attorneys have over seven decades of compound experience of dealing with IRS investigations and defending cases in New York state courts and in federal courts. Tax fraud defense attorneys from this New York City based law firm defend both private and corporate clients in the toughest cases of tax evasion and related charges.