The terms “tax evasion” and “tax avoidance” sound like they should be synonymous, but they are actually very different. Tax avoidance refers to using legal means to reduce the amount of taxes you owe. Tax evasion means not reporting all your income, and it is against the law.
What you do not know about tax evasion has the potential to harm you. Here are some important things you may not know but should.
1. The rate of evasion varies based on the type of taxes and the income
The amount that you earn and the type of taxes you pay may affect whether you are likely to commit tax evasion. Research from the Brookings Institute shows that low-income earners account for 12% of tax evasion cases and high-income earners represent 61%.
You may think that corporations would be more likely to commit tax evasion. However, the research shows that 72% of tax evasion cases involve individual income taxes.
2. The tax gap is a measure of evasion
The IRS quantifies tax evasion by using a measure called the tax gap. In an IRS audit, the tax gap is the difference between the amount of taxes you owe and the amount you pay voluntarily in a timely manner. A large tax gap could lead the IRS to conclude that you have committed tax evasion.
3. Tax evasion can be unintentional
The IRS does not need to prove that you acted with the intention of underreporting your taxes. You could have made an honest mistake in reporting your income and still be liable for tax evasion.
It is rare for a conviction on tax evasion charges to result in prison time. However, depending on the severity of the defense, you could face incarceration on charges of tax evasion.