How do I do tax evasion?

Tax avoidance and tax evasion are two very different things with different definitions and different consequences.Tax evasionis the use of illegal methods of concealing income or i

How do I do tax evasion?

Tax avoidance and tax evasion are two very different things with different definitions and different consequences.

Tax evasionis the use of illegal methods of concealing income or information from the IRSor other tax authority. Tax evasion can result in fines, penalties and/or prison time.

Tax avoidanceis the use of legal methods of reducing taxable income or tax owed. Claiming allowed tax deductions and tax credits are common tactics, as is investing in tax-advantaged accounts such as IRAs and 401(k)s.

The difference between tax evasion and tax avoidance

The difference between tax evasion and taxavoidance largely boils down to two elements: lying and hiding.

Tax avoidance is structuring your affairs so that you pay the least amount of tax due. Tax evasion is lying on your income tax form or any other form, says Beverly Hills, California-based tax attorney Mitch Miller.

Concealing assets, income or information to dodge liability typically constitutes tax evasion.

Jail time and other penalties for tax evasion

An innocent mistake on your tax return doesnt automatically turn you into a tax evader  intent is a factor.

But if you did intend to evade taxes,heres a taste of the penalties you could face,according to the IRS:

Five years in jail, and/or

A fine of up to $250,000 ($500,000 for corporations).

A bill for the cost of prosecuting you.

Prison time is a real possibility for willful tax evasion, but civil penalties may be more likely, according to Miller. Still, civil penalties add up  they can easily double the tax originally owed, he says. Some examples include:

Failure-to-file penalties.

Accuracy-related penalties.

Interest on penalties owed.

Another consequence of tax evasion is higher audit risk. Typically, only the last three years of your tax returns are eligible for audit. If you omit 25% or more of your gross income [from a tax return], that extends the statute of limitations to six years, Millersays.

Your tax preparer mightdump you, too.

We can only advise and guide and say, OK, in this kind of case, you should really change this. This is not good, says Greg Freyman,a CPA in Jacksonville, Florida. And if the client refuses or doesn't want to do it, then it's up to us. Do we want to work with this client, is this client ethical?

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Tax evasion doesnt require elaborate schemes or dark-alley meetings. Here are a few examples of how it can happen more easily than you'd think.

1. Paying for childcare under the table

Paying someone who works for you in cash doesnt constitute tax evasion,Freyman says. What does, however, is a lack of communication with the IRS and payroll tax payments. You should report the wages you pay on Schedule H and give the worker a W-2 each year, he says. Not sure if that household helper counts as an employee? IRS Publication 926 will help you decide.

Income is income, Freyman says.

2. Ignoring overseas income

This often affects people who work or own rental properties outside of the country, Freyman says.

We've heard a lot of times: But my property is not in the U.S. Why in the world should I report any income on it if it's a rental? he says. That's one that always gets people. They think just because it's out of the country, they don't have to report it.

3. Banking on cryptocurrency

Using virtual currencies wont get you through any secret loopholes. Cryptocurrencies are a new phenomenon, but the IRS already has rules about them: Their transactions are taxable. And sometimes taxpayers overlook cryptocurrency holdings that have increased in value.

They might get rid of it and not realize that that's still income, Freyman warns.

4. Not reporting income from an all-cash business or illegal activities

Some of the most common tax evasion cases involve people running cash businesses who pocket money from the cash register without reporting the income, Miller says.

That's tax evasion, he says. That is very, very common  and the IRS knows that's very common.

Tax evasion also happens when people dont report income from illegal activities, such as drug dealing or prostitution. (Yes, you have to report that on your tax return.)

Examples of tax avoidance

Your tax prep software or tax advisor can help you findlegaloptions for tax avoidance.

What to do if you want to come clean

File an amended returnusingIRS Form 1040-X, which lets you make changes to tax returns youve filed in the past.

In general, the IRS is sort of like religion, Miller says. If you're contrite, they generally won't nail you.

But, he adds, There are certain areas that they do not compromise on."

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