The tax system is complicated. It is one of the most complex portions of the legal system, and it gets worse every time somebody tries to reform the system. Add to that the fact that tax policies are emotion-laden and bring out many divisive political debates, and there is no shortage of opinion about how the system should work. The term “tax fraud” is thrown around a lot, but it has specific meanings and people who have any doubt about whether an act constitutes tax fraud should consult a professional.
What is normally called tax fraud can take many forms. It can include failure to file tax returns, failure to report income, and engaging in abusive tax evasion schemes that try to deceive the Internal Revenue Service about where money is, or who controls it. What the courts have made clear, however, is that tax avoidance (not evasion) is not illegal. This means that it is perfectly legal to use the lax law to arrange your affairs so that you minimize the tax that you pay. The dilemma comes in trying to ensure that you are using the law, not breaking the law.
There is no shortage of charlatans who are willing to take your money in exchange for their “system” that they claim will spare you from paying tax on your income. If it sounds too good to be true, it probably is. Many of them go to jail for their schemes, and sometimes their clients and customers do also. The IRS prints a publication called “the truth about frivolous tax claims” which covers many of the alleged loopholes that tax gurus will try to sell to the unsuspecting public. Sometimes they will try to argue that the tax is unconstitutional. This argument was rejected in 1916 by the Supreme Court. People who attempt to justify a failure to pay income taxes on this ground usually face extra penalties for making a frivolous claim.
Failing to file tax returns, while not quite as serious as actively hiding wealth through deceptive measures, will also result in increased tax problems. In addition to the original tax owed, non-filers face fees for failing to file as well as penalties and interest on the amount owed.
If the IRS suspects that tax has been incorrectly paid, their first step will to open what it calls an examination. Most people call the examination and audit. This can be done with or without the taxpayer’s input, but usually they will request that the taxpayer assist via an interview or by providing documents. If the IRS examiner believes that tax was incorrectly paid, he or she will mail a notice of the proposed findings and ask for comment. After taking those comments into account, the IRS will issue and assessment of tax due, and give the taxpayer a certain amount of time to challenge the audit results in a tax court. After the time has passed, the amount due passes into collection efforts.
If you are thinking about treading the line between tax avoidance and tax evasion, it is imperative that you consult a qualified tax attorney. If you have already been notified of an examination or audit, professional help is a must. Once the audit is in process, there are deadlines and everything to say 9or fail to say) can come back to haunt you.