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As a taxpayer, you must file your federal income tax returns every year. If you run your own business or have considerable assets, the process can be complicated. What this means is any perfectly innocent mistake may be deemed to be suspect and lead to an IRS investigation.
Therefore, even though you may be a law-abiding taxpayer, you should clearly understand what tax evasion is, its statute of limitations, and its penalties. By doing so, you will know how to avoid falling into the trap.
But, what exactly is tax evasion?
It is an illegal act where you deliberately avoid to pay or underpay your federal taxes. Since it is a federal offense, once you are caught evading your taxes, you will be subject to criminal charges and substantial penalties.
It does not matter if you refuse to submit the appropriate tax forms when the IRS comes knocking. They can still determine if you are owed any taxes from the information they acquire through third-party sources.
However, the crime is tax evasion if they determine that the failure to pay was intentional.
The IRS officially recognizes two types of tax evasions.
• Evading payment
It involves the hiding of assets or money that you would otherwise use to pay your taxes. A good example is hiding your money in an offshore account, away from the reach of the IRS.
• Evading Assessment
Avoiding assessment is when you do take action to prevent the IRS from conducting a proper tax assessment. A good example is by intentionally leaving out assets and falsifying your records to avoid taxation.
But how different is it from tax fraud?
Although you may use the term tax evasion and tax fraud interchangeably at times, the two have different meanings. Tax evasion is a misdemeanor. It happens when you refuse to pay your tax returns. It can also be a felony when you fail to pay your taxes after an assessment. On the other hand, tax fraud is a felony and occurs when you provide false tax records or lie in your tax returns so that you can back up your claims.
When facing a tax evasion case, you need to know how long the statute of limitations can last. The statute of limitations is the amount of time a prosecutor has before they can file for the case. Typically, the IRS gets three years to perform an audit on your returns.
If they find that you may have concealed more than 25 percent of your income, the investigation time may double to 6 years. Other reasons may also lead to the extension of the time to file for charges.
When you are not in the country, and you are facing a tax evasion lawsuit, the statute of limitations may temporarily stop running until you return to the country. Moreover, The IRS could decide to treat every fraudulent return as single entities and start counting the six years from the last charge of tax evasion.
There is a limit to how far back the IRS can look when filing charges against you. However, civil tax fraud does not have any statute of limitations. Therefore, the IRS has the right to look as far back as they want.
Tax Evasion Crime and Charges
You can only receive prosecution of your tax evasion only when it is found to be intentional and not from a difference in opinion or effort.
The sentence you receive for tax evasion may be influenced by the amount of tax avoided as well as other factors.
According to Section 7201 of the Internal Revenue Code, The IRS has to have the following to prove your crime:
• They have to show that there is an unpaid tax liability
• They must prove that you took action to evade the tax
• They must prove that there was special reason for you to evade the tax
Every year in the U.S., hundreds of millions of dollars in federal taxes go unreported due to tax evasions. Most of the people that are associated with such crimes have amassed vast fortunes. They can hire lawyers that can take care of such high profile cases