Tax avoidance is the legal application of the tax rules in order to reduce the amount of tax that you owe.

Tax evasion refers to any intentional method employed to illegally evade paying the tax that you owe. Tax evasion is subject to criminal prosecution.

Here are some examples of tax evasion:

Not filing a Personal Income Tax return when required
Filing a frivolous tax return. [a return with information that is untrue or incomplete]
Not reporting taxable income, such as the income received from being paid “under
the table,”
Claiming fraudulent deductions [which could include deductions for items that don’t exist
or that don’t qualify as deductions under the tax law.]
Claiming personal expenses as business expenses.

What are some of the penalties of tax evasion?

Tax Evasion Penalties:

Failure-to-file penalty. Up to a maximum of 25% of the tax due
Failure-to-pay penalty: Up to a maximum of 25% of the tax due
Tax Penalty for frivolous return: $500 penalty.
Accuracy-related penalty: An accuracy-related penalty of 20% applies to any
underpayment due to: Negligence or disregard of rules or regulations or Substantial
understatement of income tax.

Civil Penalties

Filing late: Up to a maximum of 25% of the tax due.
Fraud: up to a maximum of 75% of the tax due.
Return over 60 days late is the smaller of $100 or 100% of the unpaid tax.
Paying tax late: Up to a maximum of 25% of the tax due.
Combined penalties: If both the failure-to-file penalty and the failure-to-pay
penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file
penalty is reduced by the failure-to-pay penalty. However, if you file your
return more than 60 days after the due date or extended due date, the
minimum penalty is the smaller of $100 or 100% of the unpaid tax.
Accuracy-related penalty: The penalty is equal to 20% of the underpayment.
– You underpay your tax because of either “negligence” or
– You “disregard” the rules or regulations or
– You substantially understate your income tax. .
Fraud: If there is any underpayment of tax on your return due to fraud, a penalty of
75% of the underpayment due to fraud will be added to your tax.

Criminal Penalties

You may be subject to criminal prosecution and need to go to trial for actions such as:
Tax evasion,
Willful failure to file a return or
Supply information or
Pay any tax due or
Fraud and false statements or
Preparing and filing a fraudulent return

Remember to always consult with your tax advisor regarding your income tax needs.

Stacie Clifford is licensed by the California Board of Accountancy.