By now you have probably received your W-2s, 1099s, 1098s or other appropriate tax forms in the mail or electronically. Like many, you may dread the thought of preparing your taxes, especially if you are confident you will owe the government even more money.
Just like you look for ways to save money on anything, you may want to find ways to avoid paying too much on your taxes. There is nothing wrong with wanting to minimize your tax burden, and there are numerous legal ways to do this.
Legal tax deductions and credits
You may want to go over your information to determine whether any of the following ways to reduce your tax obligation could apply:
- Itemizing every legitimate deduction that applies to your situation, such as mortgage interest or home business expenses
- Claiming tax credits that apply to you, such as earned income credit, adopting a child or attending a qualified institution of higher education
- Deferring taxes through an approved plan, such as an IRA or a 401(k)
- Using legal loopholes or tax shields to reduce your taxable income, such as charitable contributions or depreciation expenses
These are lawful ways to avoid paying more taxes than you need to. They are not ways of evading your obligation to pay taxes. Tax evasion is altogether different, and it is a crime that may result in significant penalties, including the potential for hundreds of thousands in fines and imprisonment.
What is tax evasion?
Evading your taxes is intentionally not paying what the government says you owe. This may include your personal income tax or various business taxes, such as sales or employment taxes. Tax evasion is a form of fraud since it involves deceiving the Internal Revenue Service. Tax evasion may take any of the following forms or others:
- Failing to report every source of income
- Under-reporting the amount of money you earn
- Falsifying your business accounts or keeping a separate set of books for tax purposes
- Claiming more deductions than you actually have
- Claiming business expenses that are really personal expenses
- Hiding assets or income to avoid reporting them
If you own a California business, the IRS may investigate you if they suspect you of paying your employees in cash to avoid having to report it or failing to send the IRS money you withhold from your employees’ paychecks. Whether you are facing an investigation by the IRS for your personal or business tax issues, you would be wise to understand the pertinent laws and the potential ramifications you may be facing.