By now, you might've heard of the term tax evasion or used it in one of your conversations. While some people downplay the word sometimes, it is important to know that tax evasion is quite severe. However, it is also important to know that it is nothing like tax avoidance, where tax evasion is punishable by law because it is treated as a crime. On the other hand, tax avoidance isn't.

That being said, here's what you need to know about tax evasions—what it is, the examples, and the consequences:

What Is Tax Evasion?

Tax evasion is essentially the deliberate and illegal act of an individual or organization to avoid paying taxes. It is done by not declaring all of your income, thus not paying the necessary amount of taxes that you actually owe.

Tax evasion is punishable by jail, fines, and interest. The law also requires taxpayers to report all income and pay taxes on it. The Internal Revenue Service (IRS) also has the power to audit taxpayers.

What Are the Examples of Tax Evasion?

Example 1: Under-Reporting Income

This is the most common example of tax evasion. This occurs when a taxpayer under-reports his or her income in order to pay less taxes. For example, a taxpayer may report $50,000 worth of income, but really has $100,000 worth of income. This is tax evasion because the taxpayer did not declare all of his income.

Example 2: Over-Claiming Deductions

The second example of tax evasion is when a taxpayer over-claims deductions in order to lower his or her taxable income. For example, a taxpayer may claim a $10,000 deduction, but really only has $3,000 worth of qualifying deductions. This is tax evasion because the taxpayer over-claimed his or her deductions and thus under-reported his or her income.

Example 3: Under-Reporting Interest Income

This is the third example of tax evasion because a taxpayer may be reporting only a small amount of interest income but has a lot of interest income. This is tax evasion because the taxpayer has not reported the large amount of interest income.

Example 4: Avoiding Reporting All Assets

In this example of tax evasion, a taxpayer may be trying to avoid reporting all of his or her assets. For example, a taxpayer has $50,000 in cash, but doesn't want to report it to the IRS, so he or she doesn't report it.

What Are the Consequences of Tax Evasion?

A tax evasion conviction may result in heavy fines and imprisonment. Tax evasion is a very serious crime, and depending on the nature of the crime, it may have severe consequences. For example, tax evasion which involves more than $5,000 worth of taxes is treated as a Class D felony. Such a conviction may result in up to five years in prison and a fine of up to $5,000.

Furthermore, tax evasion which involves more than $100,000 worth of taxes may result in a Class B felony. Such a conviction may result in five years to 15 years in prison and a fine of up to $10,000.

Conclusion

Tax evasion is a crime, and it's pretty easy to commit. Taxpayers are required to report all of their income and pay their necessary taxes. They also need to be knowledgeable about the law. Failing to do so can mean big fines and even imprisonment—two things you never want to deal with when attempting to save money!

Tottax offers financial services to help individuals and companies meet their tax obligations. If you are looking for business tax filing services and more in Denver, reach out to us today!