Legal Considerations of Tax Evasion and Tax Avoidance

Author: Miod & Company
Date: March 9, 2022
Category: Tax
Average Time Reading: 5 minutes

Sometimes you and your spouse aren’t on the same page when going through a divorce. Whether you disagree about the logistics or the separation itself, this isn’t an easy process on your own.

The valuation and division of marital assets are crucial in the settlement agreement. Still, if you or your ex-spouse is trying to protect your/their assets, things are about to get a little trickier, especially your taxes.

You need to know about the consequences of your actions when involving taxes because of what sets apart tax avoidance and tax evasion. Read on to learn more.

Evasion vs. Avoidance – What’s the Difference?

Even though tax evasion and tax avoidance sound quite similar, it’s crucial to know why they are different.

Tax avoidance is the depreciation of the income tax that an individual or business owes. Claiming all allowed deductions and credits forms the basis of tax avoidance. Tax avoidance includes  deductions and credits such as child tax credit, retirement deductions, or a mortgage tax deduction.

Most importantly, tax avoidance is legal and lowers your owed taxes through structured transactions.

 On the other hand, tax evasion relies on other methods to lower your tax liability. Tax evasion includes underreporting your income, concealing assets in secret, offshore accounts, and other means of deceiving the IRS.

And it’s very illegal.

While you should avoid evasion at all costs, others may also try to keep away from tax avoidance. For example, the 2018 tax bill increased the standard deduction cap to $10,000 for state and local taxes which affected previous eligibility, such as for someone looking for a mortgage payment deduction. 

Nonetheless, many people and businesses can still receive deductions through tax avoidance, the wiser and legal way.

What Are The Requirements of Tax Evasion?

Understanding how people commit tax fraud is important to avoid it. 

When a court considers a case of tax fraud, many factors will influence their decision. 

One of these factors includes examining an individual’s financial situation

Next, the efforts to conceal the marital assets of the accused are considered. If the concealed assets were associated with another person through a false name and SSN, they could also be charged for identity theft. 

Also, IRS judges concealed income or failure to report labor not following standard payment methods during a tax filing. Individuals or companies trying to lower tax liability are involved in tax fraud cases on the IRS website.  

Fortunately, you can dodge these allegations by partaking in tax avoidance.  

What Are The Risks?

While it should be an easy decision between tax avoidance and tax evasion, some may not even know they are committing tax crimes. If you’re trying to protect your marital assets from a spouse that betrayed you, it’s understandable not to want to split it evenly. 

Whether or not you intend to hide assets or skip payments criminally, the consequences can be intense. If found guilty, you will be liable to pay back everything left unpaid. 

The IRS states that tax fraud or evasion penalties can include imprisonment of up to five years, fines up to $250,000 for individuals and $500,000 for corporations, and sometimes both, not to mention the costs of prosecution on the side. Generally, tax evasion is determined by the reason behind the deceit; if you are found guilty of intentional failure to pay your taxes, then you may be subject to jail time. 

What’s Next For You

Learning the difference between tax evasion and tax avoidance is only a step in making your divorce easier. If you identify with either, bring it to an expert for advice.

While tax avoidance isn’t a crime, your deductions could affect your contribution to alimony or child support payments depending on your circumstances. If you think you have dabbled with tax fraud even as a means of protecting your assets, it’s time you call up Miod and Company.

With our dedicated team of accountants and advisors, we are here to guide you in the right direction

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