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Avoidance versus evasion: When are tax reduction practices illegal?

Dealing with the Internal Revenue Service (IRS) likely falls within the top three when making a list of things you would like to avoid. Unfortunately, 2,400 citizens of the United States will probably soon find agents of the IRS knocking on their door as a result of the Panama Paper fiasco.

Why was this release a fiasco? It shines a light on the slippery slope of tax avoidance versus tax evasion.

Finding the balance between legal tax avoidance measures and illegal tax evasion practices can be difficult. Those who are attempting to find this balance need to tread carefully, as losing your balance and falling into the realm of the illegal can come with serious consequences.

What is the difference between tax avoidance and tax evasion?

There are many practices to reduce tax obligations that are perfectly legal. Using an overseas account to establish a foreign business is one example. However, American citizens are generally required to disclose these accounts and may have to pay taxes on the money they make in these endeavors.

In contrast, making foreign investments with the intent of concealing funds from the IRS is illegal.

Illegal practices like this received media attention with the release of the Panama Papers. The papers refer to documents released by a law firm in Panama that was used by Americans to conceal foreign accounts and evade tax obligations. The papers that were released contained names of clients who had used their services.

One common illegal practice used by this group involved the use of anonymous accounts, private foundations and shell corporations to hide funds from the IRS. This was touted as a way to avoid paying taxes on assets in these accounts. The release of the papers will likely prompt audits by the IRS. If these audits uncover illegal activity, serious penalties could apply.

What kind of penalties can come with tax evasion?

Those who are convicted of tax evasion face criminal penalties that can range from monetary fines to imprisonment.

Those who face these charges have options. Defenses are available that can help reduce the risk of conviction. Contact an attorney to help better ensure your rights are protected.

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