Many Texas residents think that tax evasion and tax avoidance are the same, but this is not the case. Tax evasion is illegal while tax avoidance is legal.
Understanding tax avoidance
Tax avoidance is the legal practice of minimizing your tax liability. People can accomplish this either through aggressive or passive means. Aggressive tax avoidance is when you use legal loopholes and exploit gray areas in the tax code to minimize your taxes, like setting up a shell company in a jurisdiction with very low taxation rates for foreign investors. Conversely, passive tax avoidance is when you take advantage of tax breaks that are available to everyone, such as contributing to a retirement account or using tax-loss harvesting.
Tax evasion is the illegal practice of avoiding paying taxes. People can do this by underreporting their income, hiding assets or income or making false claims on their taxes.
If the IRS suspects that you are evading taxes, they will conduct criminal tax investigations to gather evidence. If their findings are convincing enough, they will go to court to get a warrant that will allow them to raid your home or business and seize assets.
Penalties for tax evasion in Texas
If found guilty of tax evasion in Texas, you could face the following consequences:
• A fine of up to $250,000
• Up to five years in prison
• Disgorgement of any ill-gotten gains
• Forfeiture of property used to commit the crime
In some cases, the court may also order you to pay the IRS restitution. This is the amount of money that you would have owed in taxes if you had not committed tax evasion.
It is important to note that even if you are found guilty of tax evasion there may be ways to reduce your penalties. For example, if you can show that you have made an honest mistake, the court may be willing to give you a lighter sentence. In addition, if six years have passed since you committed the alleged crime, you can ask the court to dismiss the charges against you in respect of the statute of limitations on tax evasion lawsuits.