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Tax avoidance versus tax fraud

On Behalf of | Sep 14, 2022 | White Collar Crimes

Tax fraud is the failure to pay or evade your tax bill. The IRS calls fraud the misrepresentation of material facts or failure to speak when your knowledge may prevent material damage.

Paying less in taxes does not mean you committed tax fraud. There is tax evasion and tax avoidance. See below to learn more about tax fraud to avoid making a mistake that leads to jail time or financial penalties.

Tax avoidance is legal

Tax avoidance to pay less in taxes is not illegal. The U.S. gives business owners, investors and the average worker plenty of ways to avoid paying taxes. However, it takes significant knowledge about the tax code to do so legally. If you handle a substantial amount of funds, you must exercise extreme caution when trying to pay less in taxes. One seemingly harmless change in your financial structure might lead to you paying more taxes.

Tax evasion breaks the tax code

Tax evasion is the failure to comply with the tax code. You might technically pay more taxes than someone else but still be guilty of tax fraud. Fortunately, the IRS distinguishes between tax fraud and negligence. The IRS might give you a pass if you make an innocent mistake. However, even mistakes made from ignorance might impose a penalty. Acting willfully ignorant does not excuse tax evasion. In other words, your lack of education on the tax code is not a workaround to avoid tax fraud.

Tax fraud is one of the most common crimes in the United States. Double-check your finances before tax season and know the difference between legal and illegal tax avoidance.