According to a recent Brookings Institute report based on IRS statistics, tax evasion is responsible for one out of every six federal tax dollars owed but not paid. This has a huge impact on the U.S. economy. Every year, unpaid taxes amount to about 75% of the federal budget deficit.
The incidence of misreporting and evasion is particularly significant for sole proprietorships, farms, and high-income households. Illegal tax evasion and legal tax avoidance call into question the fairness of the federal tax system because lower-income households seem to pay more than their fair share of taxes.
Tax Evasion is Always Illegal
Whether it is deliberate or inadvertent, tax evasion is illegal. Unreported income, reporting expenses you did not incur or failure to pay taxes owed are common forms of tax evasion. Employment tax evasion (such as paying someone “under the table”) is also a common type of tax evasion. Mistakes on a tax return are an example of inadvertent tax evasion.
According to the Brookings Institute, tax evasion rates differ depending on the type of taxes and the manner of reporting:
- Payroll taxes and self-employment taxes account for 19% of tax evasion, but 39% of taxes paid.
- Corporate taxes account for 9% of evaded taxes, but only 9% of taxes paid.
- Individual income taxes account for 72% of tax evasion, but only 44% of taxes paid.
Not surprisingly, high-income households have higher tax evasion rates than middle- and lower-income households:
- 61% of tax evasions and only 44% of earned income comes from households with incomes from the top 10%
- 28% of tax evasions and only 18% of earned income comes from households with incomes from the top 1%
- 12% of tax evasions and 14% of earned income comes from households with incomes in the bottom 50%
The Brookings Institute report suggests that, “If we collected every dollar of taxes that were owed across the system, our fiscal problems would be largely gone… Adequately funding the IRS to pursue tax enforcement would raise revenues and assure the public that the system isn’t rigged in favor of the wealthy.”
Legal Tax Avoidance Strategies
While tax evasion can bring criminal penalties, including jail and substantial fines, tax avoidance is legal. Tax avoidance includes taking advantage of a property tax deduction and other deductions on a federal income tax filing as a way to limit or avoid taxes. Other legitimate forms of tax avoidance include setting up tax-deferred plans (IRSs, SEP-IRA, or 401k) and tax credits.
Since the US tax code is so complex, it's best to seek the advice of an experienced tax attorney before developing a tax avoidance strategy. Consulting with a reputable tax lawyer can help avoid any IRS investigation or other legal vulnerability while maximizing your investments and wealth.
Experienced Tax Lawyers Find Tax Strategies for Individuals and Companies
The law firm of Robert J. Fedor Esq. LLC provides aggressive representation for clients throughout the USA and globally. With offices in Chicago and Cleveland, we can help you develop wealth management and tax avoidance strategies. To learn more or to schedule a free consultation, call 800-579-0997 or contact us online.