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TAX EVASION AND TAX AVOIDANCE
Tax evasion and tax avoidance are two different things. The first
is illegal and the second is legal. Here we will answer some of the
more common questions regarding tax evasion and tax
avoidance.
I didn't file my income tax and it's long overdue, did I
commit tax
evasion ?
Yes, and in case you didn't know, tax evasion is a felony ( a criminal
offense ). The Internal Revenue Code provides "Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof shall,
in addition to other penalties provided by law, be guilty of a
felony and, upon conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or imprisoned not
more than 5 years, or both, together with the costs of prosecution."
-- Title 26 U.S. Code, section 7201.
Note that it does not matter whether the taxpayer knows of the
criminal implication of his/her actions, what matters is that
the three (3) elements of the offense, are present:
-
additional tax due and owing -- offender owed more tax than
reported.
-
attempt in any manner to evade or defeat any tax.
-
willfulness.
-- See IRS Internal Revenue Manual, section [9.1] 3.3.2.2.
Tax crimes are investigated by the Internal Revenue
Service Criminal Investigation Division (CID). When the CID agent
finds compelling reasons to prosecute, the Internal Service
attorneys will review the case twice before the IRS will approve it.
The IRS, should it decide to prosecute, will then forward the case to the United States
department of Justice Tax Division in Washington DC, where it will
again be subjected to another review. Should the Department of
Justice Tax Division in Washington , DC approve the prosecution, the
case is then brought before the local US Attorney's office with the direction that the individuals named therein be indicted
(formal accusation in writing) and prosecuted for the offenses
alleged.
The IRS has a time limit of six years from the date
your non-filed return was due to prosecute the case. If the IRS
fails to do so within that period, then it losses all rights
to file a criminal action against you for tax crime, but it can
still file a civil action against you, since there is no time limit
for that, and you may be subjected to audit for tax assessment and
collection anytime.
Note: The rule that there is no time limit to audit collect from the
taxpayer is true only while the taxpayer hasn't yet filed his/her
return. However if the taxpayer did file a return, then the audit
time limit of three (3) years and the collection time limit of ten
(10) years, counted from the date the return was filed, begins to
run.
What is tax avoidance, is it the same as tax evasion?
Tax avoidance means the legal attempt of a taxpayer to minimize the
payment of taxes for his/her own benefit. This is different from tax
evasion, which implies an illegal attempt to avoid the tax burden.
"Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure.
Evasion, on the other hand, involves deceit, subterfuge,
camouflage, concealment, some attempt to color or obscure events, or
makes things seem other than they are. For example, the creation of
a bona fide partnership to reduce the tax liability of a business by
dividing the income among several individual partners is tax
avoidance. However, the facts of a particular case may show that an
alleged partnership was not, in fact, established and that one or
more of the alleged partners secretly returned his or her share of
the profits to the real owner of the business, who, in turn, did not
report this income. This would be an instance of attempted evasion."
- IRS Internal Revenue Manual, Section [9.1] 3.3.2.1.
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