Tax avoidance or tax evasion?

Every year, most New Jersey residents must file a federal and state income tax return. Those who are self-employed may have additional returns to file on a quarterly or annual basis. Taxpayers are encouraged to take any credits or deductions that they qualify for in an effort to pay as little as possible. However, tax evasion is a serious crime that may come with severe penalties such as prison time.

UNDERSTANDING TAX AVOIDANCE

Tax avoidance occurs when you employ legal methods of reducing your taxable income. Let’s assume that you earned $50,000 during the most recent tax year. Let’s also assume that you donated $500 to charity. In such a scenario, your taxable income would be $49,500 assuming that the donation is made to a qualifying entity. You may also be able to reduce your taxable income by contributing money to an IRA or by writing off interest paid on a mortgage or student loan balance.

UNDERSTANDING TAX EVASION

Tax evasion occurs when you misrepresent facts on your tax return in an effort to avoid paying taxes owed. For instance, instead of saying that you donated $500 to charity, you record a donation of $5,000. It’s important to note that you won’t be charged with tax evasion for making an honest mistake on a return. Therefore, a criminal defense against the charge may be to assert that you made a math or recording error and had no intent to defraud the government.

If convicted of tax evasion, you may face financial and other penalties that may cause a significant interruption to your life. It may be possible to use financial records, copies of previous tax returns or other documents to establish that you either didn’t break the law or didn’t intend to do so.

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