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There is a thin line between tax avoidance and tax evasion. Tax avoidance is when an individual deliberately plans their tax payments to lower their tax bills and avail maximum benefits. On the other hand, willful tax evasion is when individuals escape paying the taxes they owe by unlawful means. Such as hiding their real income and not submitting their true wealth. Basically, tax avoidance is legal. And tax evasion is not.
The federal and state governments have systems that can prove whether you willfully engage in tax evasion. Which leads to multiple penalties, including years in prison, fines, and the moral loss that comes with it. Which affects your employment and relationships. The governments deliberately advertise cases of tax evasions to persuade people to fulfill their duties as lawful citizens.
However, whether you willfully engaged in tax evasion or crossed the line unknowingly, you should consult a legal representative who can guide you with the best course of action. Apart from that, you should know how the government proves willful tax evasion. And what you should be concerned about when planning to reduce your tax bill.
When Is Willful Tax Evasion?
Since anyone rarely admits that they tried to evade tax. The authoritative government body, IRS (Internal Revenue Service), explores indirect evidence that proves the misconduct regarding tax. Although it might seem an invasion of our privacy and personal property, the investigation of willful tax evasion is authorized by the supreme court by “any conduct, the likely effect of which would be to mislead or to conceal.” Spies v. the United States, 317 U.S. 492, 499 (1943).
Court rulings regarding tax evasion cases can be vague. Since there is no test to prove whether tax evasion was willful or not. Therefore, you need to be careful of what you shield or try to hide from the court. As the plaintiff may use the slightest misfortunes against you. In some cases, judges allow willful blindness to the jury if they find that you are compromising. Or if they are reluctant to show any piece of information.
How Does The Government Prove Tax Evasion?
The government uses these methods to prove your tax evasion is willful.
Net Worth Method
Individuals often omit a part of their net income to lower the applicable tax. For example, one can overlook a day’s transaction in the accounts or omit the receivables. However, the IRS is well aware of this fraud and has identified missing worth in the past. It does this by totaling the individual’s net income and reducing any non-taxable income of the year. The total is then compared to the same net taxable income of the past year. If there is a difference in the net taxable income that is not explainable, it directly indicates that the person willfully omitted their income.
Expenditures Method
The expenditure method is often used with the net worth method to identify the relation between the taxpayer’s net income and net expenditures. This method calculates the cost-of-living of the taxpayer and by totaling their net expenditures by the year-end minus the non-taxable income, which is used to pay for those expenses. The IRS officials should consider all assets and liabilities of the current year only since the previous years’ are taxed already. However, the taxpayer’s net taxable income should justify the cost of living, not covered by non-taxable income.
Bank Deposits Method
LLC, S, and C-corporation entities using the business bank accounts or joint accounts for partnership businesses are generally under the scrutiny of the IRS. The IRS uses bank deposits to determine whether a company or business has engaged in willful tax evasion. The total of bank deposits made by the taxpayer is used to identify how the income was generated, and the organization investigates any unreported income before presenting it to the jury. However, the total bank deposits are reduced by the total deposits made through non-taxable sources, including mutual transfers, loans, and gifts.
Specific Item Method
The specific item method involves the investigation authority focusing on one item or transaction which does not settle in the thread of transactions regarding the same item. If the return transaction indicates a sizeable increase or decrease in the amount, the IRS will scrutinize that to prove that you have either failed to report an income. To prove you guilty, the IRS does not need to identify the exact amount of fraud but only enough to verify that the difference is noticeable.
Plan Skillfully to Avoid Tax Evasion
You might only be trying to reduce your tax bill. But unwillingly crossed the line and landed in the court facing tax evasion charges. To avoid that, you should hire a tax lawyer who will help you keep your tax bill low without committing an offense. Lawyers generally recommend these strategies to keep your obtained tax rate low:
- Minimize your taxable income
- Maximize your tax deductions and credits
- Control your income and deductions’ timing
Forecasting Income and Expenses Is Vital
You can keep your tax rate low by effectively planning your taxable and non-taxable income for the next few years. Estimating your income by all sources gives you a safe margin to see how you can plan your tax payments. Forecasting income at a single amount can lead to inflamed tax bills as your income can increase over the years. Therefore, planning should be done by keeping all factors in mind.
Final Thoughts
While there is no harm in avoiding tax to keep your savings maximized. Willful tax evasion is an offense you should stay wary of. You can help yourself or ask for legal consultation from a tax lawyer. They will calculate your wealth for the coming years, including your income, cash flow, and business forecast.
