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TAX AVOIDANCE-A CLOSER LOOK

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If one illegally avoids to pay taxes due he is guilty of a federal criminal offense punishable by fines and imprisonment.

So, when tax avoidance methods are implemented by the taxpayer, it is imperative that he understands what is legal and illegal.

That which is founded on law, or derives authority from law, i.e., is interpreted by the courts to be lawful, is said to be legal. That which is not authorized by law, or interpreted by the courts to be lawful, is illegal. To form an awareness of legality and illegality with respect to taxes and tax law, additional terms need to be analyzed.

See Cross-links: BUSINESS, CORPORATION, SOLE PROPRIETORSHIP, PARTNERSHIP, TAX LAW, TAX CREDIT, TAX DEDUCTIONS, TAX PUBLICATIONS, TAX COURT.

Tax Fraud, Tax Mistakes, Tax Penalties

Tax fraud is the intentional perversion of the facts to evade the payment of taxes. Tax fraud is illegal. The word "intentional" is very important. Intentional perversion is perversion that is knowingly or willfully committed.

Tax evasion is the intentional avoidance to pay taxes that are legally due. Tax evasion is illegal.

All tax evasion is tax fraud. If the taxpayer is alleged to have committed tax fraud, the taxpayer has the burden of proving the underpayment is not a result of fraud. Further, the IRS may prosecute the taxpayer in criminal court. There is no statute of limitations for tax fraud. They may prosecute forever, i.e., at any time after the crime is committed. Tax fraud is a felony. The law has penalties for people convicted of felony charges. They may include a fine, imprisonment, or both.

Also, the IRS may assess a severe monetary penalty on the underpayment they determine to be attributed to fraud (even without court action). Interest is charged from the date the tax became due to the date it is paid or to the date it is assessed whichever is earliest. Of course, the taxpayer may challenge the IRS's assertion of fraud via IRS channels or by litigation.

A tax mistake is an unintentional perversion of the facts, i.e., an omission of information or inclusion of incorrect information. Tax mistakes are usually either an unintentional overstatement of a deduction, e.g., a business expense deduction, an itemized deduction, etc., or the unintentional understatement of income, i.e., tax negligence.

The word "unintentional" is very important. Unintentional perversion is perversion that is unknowingly or unwillfully committed. Penalties assessed for unintentional perversion are less than penalties for intentional perversion (fraud).

If the IRS thinks a mistake is intentional, they may assume it is fraud (even though it many not be fraud) and assess above mentioned penalties for fraud and/or prosecute in criminal court. If a tax mistake is proven to be intentional via the judicial system, it is no longer a mistake, but fraud.

The taxpayer would try to minimize mistakes since there is always the possibility that the IRS may think an unintentional mistake was done with willful knowledge. Although it is improbable, it is possible that even an objective disinterested court of law could decide that an unintentional mistake was to the contrary-the consequences could be alarming!

If a taxpayer has intentionally changed or distorted facts, or if there is the possibility that a mistake could be determined to be intentional on a return or returns already submitted, voluntarily reporting this to the IRS does not alter the fact that fraud has been committed. The IRS can still prosecute. In cases of fraud they can prosecute anytime after the fact, i.e., there is no statute of limitations.

The unintentional overstatement of a deduction will be disallowed by the IRS. They will assess the resulting taxes plus interest (interest is charged from the original date that the tax should have been paid). The interest charged on the assessment due is usually less than the rate at which money is ordinarily borrowed. Also, if the IRS fails to locate and asses an unintentional overstatement of a deduction within the statute of limitations period (discussed below), the assessment is not allowed.

Tax negligence results from the unintentional understatement of…

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