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If one illegally avoids to pay taxes due
he is guilty of a federal criminal offense punishable by fines
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.
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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
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
Tax negligence results from the unintentional understatement of
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