You Can Avoid Taxes, Just Don’t Evade or Outright Dodge Them

For starters, let’s be clear on the differences between tax avoidance and tax evasion. Tax avoidance is legal, tax evasion is not. More specifically, it is perfectly within a taxpayer’s right to use IRS allowances to claim deductions, credits, and adjustments to income in order to minimize tax liability. But taxpayers who fail to report any part of their income are in violation of the law.

If you have made some bold or unwise assertions on your returns regarding income, deductions, or expenses, for example, you might want to consult a tax attorney. A qualified tax attorney’s expertise can help you minimize costly penalties as well as back taxes owed for such accounting indiscretions.

But what if you neglect to file altogether? Anyone required to file a tax return who willfully fails to do so, has committed a crime. It’s not a crime likely to warrant jail time, though. Except in very rare cases, Uncle Sam is most interested in getting taxpayers to file returns—even if they are delinquent.

When you do get around to filing, there are several possible outcomes:

If taxes are owed, penalties and interest can increase your tax bill 25% or more, substantially more if you have understated your income, filed fraudulently, or evaded the taxes.

If you have a refund coming to you, there are no penalties for late- or non-filing—unless you count the fact that waiting too long can lose your refund altogether! (You have up to three years from the date the taxes are due. If you’ve filed and learn that your return had an error, you have three years from the filing date—or two years from the time any taxes were paid—to make the correction.)

If you are entitled to the Earned Income Tax Credit, you must file a return within three years of the due date to claim the credit, even if you are not otherwise required to file.

If you are self-employed, filing a return within three years of the due date is how you report the income that earns you credits toward your Social Security retirement benefits.

If you have failed to file, be advised: it is possible that the IRS has filed for you. Not as nice as it sounds, the Substitute for Return (SFR) filed on your behalf is usually calculated at Single or Married Filing Separate rates, even if you qualify for “Head of Household” or “Married Joint”—lower tax rates. For more information, read the IRS’s publication.

Similarly, SFRs do not consider dependents or itemized deductions, charitable contributions, or health care expenses that might otherwise reduce your tax burden. SFRs generally give you your personal exemption, tax your income at the highest rate, and deduct any Federal tax paid. That’s it. If you are self-employed, you will also lose out on all those business expenses. Read more about business returns and SFRs in section 6020(b) of the IRS Code.

If you have not filed in a while and would like to do away with the associated stress, contact a qualified tax preparer, a tax attorney, or the IRS. They can guide you through the most common red-tape issues that can make filing difficult. If you have not filed, if your employer did not report your wages, if you’ve misplaced your W-2s—even if the IRS has filed for you—all is not lost. You may even qualify for Volunteer Income Tax Assistance, where your tax returns are prepared by volunteers and transmitted electronically to the IRS for filing.

Related Topics:

Tax Liens
Tax Levy
Tax Audits
Time to Partner With a Tax Attorney
Private Debt Collection Agencies

Case Studies: Tax Avoidance vs. Tax Evasion

Case Study 1: Seeking Guidance From a Tax Attorney

John, a taxpayer, made some unwise assertions on his tax returns, potentially resulting in a higher tax liability. Concerned about facing penalties and back taxes, John decided to consult a tax attorney. With the attorney’s expertise, John was able to minimize the costly consequences of his accounting mistakes and rectify his tax filings.

Case Study 2: Filing Delinquent Returns

Sarah, a taxpayer, neglected to file her tax returns altogether, fearing the potential consequences of her actions. After learning that late filing could still allow her to claim a refund owed to her, Sarah decided to address her delinquent returns. She sought help from a tax preparer and successfully filed her returns, ensuring she received her entitled refund.

Case Study 3: Addressing Substitute for Return (SFR)

Michael, a taxpayer, had failed to file his tax returns for several years, leading the IRS to file Substitute for Return (SFR) on his behalf. However, SFRs did not consider his dependents, itemized deductions, or business expenses, resulting in a higher tax liability. Realizing the importance of accurate filings, Michael contacted the IRS and sought assistance from a tax attorney. With proper guidance, he rectified his tax situation and filed his returns correctly.