Every individual and business in the United States has to pay taxes on their income. Although some taxpayers can reduce or even eliminate their tax obligations using tricky accounting, such practices sometimes cross the thin line between tax avoidance and tax evasion.
Trying to minimize your taxes is perfectly legal. Evading taxes that you have an obligation to pay is illegal. There are some behaviors that you may think of as tax avoidance that actually constitutes tax evasion and could lead to an audit or even criminal prosecution.
Not reporting the sale of cryptocurrency
Cryptocurrency has become a popular way for people to diversify their investments. One of the reasons that these digital currencies appeal to people is how anonymous they can be. You don’t have a name with your account on it. Instead, you have a transaction history that establishes you as the owner of a specific amount of digital currency.
Although you technically don’t have to pay taxes on the value of your cryptocurrency when you own it, you do have to pay taxes on the profit you earn when you sell your cryptocurrency holdings. Failing to disclose those transactions and the profits you earned could lead to intense scrutiny by tax officials.
Trying to hide valuable property or financial accounts overseas
Holding assets offshore has long been a strategy for the wealthy and businesses to minimize tax obligations. However, even the country’s once associated with strict financial privacy laws now often cooperate with international tax treaties.
If the Internal Revenue Service (IRS) tracks down your offshore assets before you disclose them voluntarily, you could find yourself facing a huge tax penalty and possibly also criminal charges.
Exaggerating or lying about your situation to minimize taxes
Did you try to claim your recently purchased speedboat as a business vehicle? Did you start claiming your unborn child the year before their birth because you wanted a tax credit?
Lying about your exemptions, income or household circumstances might reduce your tax burden on paper, but it could also lead to major accusations against you when those misrepresentations come to light.
Recognizing how some seemingly common behaviors could actually constitute tax evasion could help you avoid a potentially criminal tax mistake.