As we gear up for the tax filing deadline coming up on July 15, 2020, just a few days away, some taxpayers may find themselves wondering whether moves they are taking in their tax filings are legal. What is the difference is between tax avoidance and tax evasion? One key difference: one is legal and the other is not.
How can taxpayers tell the difference?
There are perfectly legal ways to actively reduce your tax obligations. Using a health savings account to help cover the cost of high-deductible medical plans is one example as contributions to these plans result in a tax deduction and withdrawals for qualified medical expenses are tax-free. Business loss deductions, charitable donations and tax credits for higher education opportunities are also legal.
But when do legal tax reduction strategies become illegal? Taxpayers who underreport or fail to report income on their tax filings are violating tax law. Those who do not report assets that are held overseas to the Internal Revenue Service (IRS) are also guilty of an illegal act to reduce tax obligations. Penalties are severe if the government can prove that a taxpayer knowingly took illegal steps to reduce their tax bill. Hefty fines and potential imprisonment can apply.
What if the IRS thinks a taxpayer has crossed the line?
Taxpayers can reduce the risk of allegations of wrongdoing by keeping records. Have receipts and copies of documentation to support tax deductions and credits. This information will be helpful to fight back in the event of an audit and counter any allegations of crossing that line between legal tax savings and illegal tax crimes.