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What to Avoid During Tax Season

If you defraud the IRS, you could be taken into custody and put in jail.

Assuming that you are allowed to be released on bail, a bail bonds company is available whenever you need it. A single phone call can help you get the cash that you need to regain your freedom while the legal process plays itself out. Let’s take a look at how an error on a tax return could cost you your freedom.

There Is a Difference Between Tax Avoidance and Tax Evasion

Tax avoidance is the practice of taking legal tax deductions that act to lower the amount that you owe to a state or federal tax agency. Business owners can take deductions for reasonable and ordinary business expenses such the cost of renting a building or buying a car for business purposes.

Homeowners are often able to deduct mortgage interest or the cost of fixing up a rental property. Those who have student loans are often able to deduct up to $2,500 in student loan interest each year. Parents may be granted an exemption for each child that they have.

Tax evasion is the act of willfully failing to report income, tax deductions or take other steps to fraudulently lower their tax burden. Even if a taxpayer makes an honest mistake, he or she could still owe back taxes in addition to fines or other financial penalties.

You Must Declare All of Your Income

Whether you earn money as an independent contractor, work for an employer or win money gambling at the casino, it must all be reported to the IRS. Alimony, child support and other forms of financial support from a former spouse or partner may need to be reported as well.

It is important to keep in mind that the IRS will receive copies of all tax forms that you receive from clients or employers. If you make money selling stock or selling savings bonds, you will receive notification from your broker, bank or credit union. The IRS will get a copy of these as well, which means that they have the ability to verify whether or not you have fully declared your income.

Don’t Take Deductions That You Can’t Defend

While you should never pay more in taxes than you rightfully owe, you should be ready to defend any deduction that you take. Ideally, you will have paperwork to back up the fact that you bought something for business purposes or that it represented a valid medical expense.

If you can’t defend a deduction or credit that you claimed on your return, the IRS could disallow it, which means that you would owe more in taxes. If the government thinks that you were trying to evade paying taxes, you could face civil and criminal penalties in addition to a larger tax bill.

Don’t Hide Overseas Income

In some cases, you will be required to pay taxes on money that you earned overseas. However, you should get credit for any taxes that you already paid to an international government. Just like accounts that you have in the United States, foreign banks will send you statements, and they may also send statements to the IRS. Therefore, it is generally easier to simply pay the tax that you owe instead of trying to pretend that your international accounts are exempt from taxes.

There is a small chance that your tax return will be selected for review. However, this doesn’t mean that you should willfully claim credits or take deductions that don’t belong to you. The IRS has anywhere from three to six years to audit a return, which means that even if they don’t catch your scheme at first, they could find patterns in future returns that could lead to significant penalties.

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