Have I Committed Tax Evasion?

Filing your tax return every year is a mandatory responsibility for American citizens, and most people know just how important it is for them to be neat, accurate, and honest when filling out the necessary paperwork—nobody wants to face the dreaded tax audit or worse, be accused of tax evasion.

The crime of tax evasion is willfully and knowingly misrepresenting or lying on your tax return forms to either lessen your tax burden or increase your return from the government. Penalties for this crime can be severe—fines of up to $100,000 and years or even decades in prison are all possibilities.

However, accusations of tax evasion are fairly rare, particularly for small instances. On this blog, we’ll explain a few common ways people commit tax evasion and whether or not you could soon have the IRS coming after you for them.

Missing or Incorrect Information

Let’s face it, tax returns are pretty complex and the more assets and varying income sources you have, the more difficult they’ll be. So as you might expect it’s actually quite easy to accidentally miss a line or write the wrong number in a blank that’s crucial to your return calculations. Are you committing tax evasion? If you willfully lied on that line or left the information out to reduce your tax burden, then yes, you could find yourself in trouble with the IRS and facing legal penalties.

However, if you simply made an honest mistake (which happens to almost everybody at least once in their life), odds are the IRS will simply send you a request for information. All you have to do is respond to the request and that’s that. In some more rare cases, the IRS choses to audit you, which can be a real pain but doesn’t usually warrant criminal accusations either. Usually the most that comes from a mistake is a minor delay in getting your refund check send out to you. The IRS generally doesn’t submit you to the Department of Justice as a tax evader unless they have a pretty large pile of evidence, such as years of repeated mistakes and omissions to back up that suspicion.

Inflating Deductions

Fewer IRS audits are being conducted each and every year, mostly because the IRS simply doesn’t have the resources to conduct as many as they once did. This means plenty of people may try to stretch their deductions and claim more than they actually can by the letter of the law in order to get a bigger refund. The most common way these deductions are abused is with home offices and small businesses who try and claim things like spare bedrooms being used as office spaces or their computer that they use for personal and business purposes as deductions.

While your chances of being caught are lower than ever, abusing deductions to get a bigger refund can lead to a $5,000 fine, and a fee of 20% of the disallowed amount or 75% of the full income tax that you owe. That could mean thousands of extra dollars. On top of that, the IRS could submit you for criminal investigation if they feel you knowingly and willingly tried to defraud them and evade your tax liability.

Failing to Report Income

This is a particularly big worry for a pretty common occupation: servers. This is because these occupations work primarily for the tips they receive from patrons to their restaurant or establishment. The IRS requires that you report all of the tips you receive each year on your tax return, but keeping track of that amount you take home each night could be a huge hassle. Some employers help their servers track this amount for them, but other times servers are on their own, and left to make nothing more than a semi-educated guess at the end of the year.

The IRS estimates that nearly half of all tips go unreported each year, but that doesn’t mean you should press your luck. Knowingly and intentionally failing to report the money you make as tips is considered willfully failing to supply information, which subjects you to a penalty for up to 50% of the Social Security, Medicare, and other taxes you owe, on top of the outstanding balance. Plus a tax evasion allowance could land you up to five years in prison and a fine of up to $250,000.

Are you going to get caught? Probably not. But just to be safe, keep a detailed record of how much you bring home in tips at the end of each shift and make sure to report that amount on your return.