The taxes we pay are vital to the functioning of a civilized society. Roadways, public schools and hospitals are just a few of the services funded by taxpayers’ dollars.
That fact doesn’t make tax-paying any more enjoyable and most of us would prefer to lower our tax liability. There are ways to do just that, legally and illegally.
IRS “red flags” that can lead to charges
Tax avoidance takes advantage of legal methods to minimize your tax liability. Deductions, tax credits and incentives produced by tax laws can reduce what you owe. For business owners, deductions may come in the form of legitimate business expenses, such as office supplies, subscriptions and professional services like tax preparers. Individuals can contribute to their 401(k)s, IRAs and healthcare plans to lower their income and receive credits for dependent children.
Though these tax avoidance strategies are legal, some may consider their use unethical. This is particularly true for the ultra-wealthy and the increasing calls to tax the rich.
Tax evasion is illegal. It involves intentionally underreporting income, overclaiming deductions and falsifying documentation to pay the minimal amount of taxes. Some examples include:
- Underreporting business income by not disclosing cash payments
- Claiming non-existent expenses
- Hiding money in offshore accounts
- Investing in cryptocurrency and not including digital assets on tax returns
The IRS has been cracking down on tax fraud and certain red flags could trigger an audit, such as:
- Claiming excessive deductions
- Using large round numbers that estimate and not actual amounts.
- Your business is always running at a loss.
- There is a mismatch between your lifestyle and income
- High charitable deductions
The best way to avoid a tax audit is to keep your records organized and accurately report your earnings and losses. You also want to stay current on the various tax laws, which are constantly changing. It’s also important to work with someone who can ensure you comply with federal and state tax laws.
If you are facing accusations of tax evasion from the government, you will need to reach out to someone who can advocate for you and strategize on a strong defense.
