There is a common saying that there are only two certain things in life, and those two things are death and taxes. However, while people often discuss the inevitability of taxes, quite a few people will take extreme measures to try to avoid paying them.
Tax minimization or avoidance through the use of charitable donations, deductions and other strategies is legal and potentially beneficial both for individuals and businesses. However, tax evasion involves fraudulently under-reporting income or misrepresenting material facts in order to claim deductions or benefits that an individual or business should not receive. Those accused of tax evasion or other offenses will have to worry about potential financial and criminal consequences.
How does the IRS enforce the underpayment of taxes?
When the IRS notices a discrepancy in your filing, possibly due to the lack of inclusion of income reported by a company in your name, they will typically send you a letter. Sometimes, they will advise you of the specific amount of income that you failed to report and what they believe your tax responsibilities for that amount actually are in that first letter that they send.
Other times, they may advise you of a pending audit. During that audit, IRS professionals will review your financial records and determine if you owe any outstanding amount. You have the right to defend yourself, but if there are unreported earning or unpaid taxes, you will likely find yourself ordered to repay the amount in full and then some.
When you owe taxes, you pay more than just taxes
If you don’t pay the full amount of taxes owed by the filing date for the year you incurred them, the IRS could eventually figure that out, leaving you vulnerable to enforcement action. Whether through an audit or other means, the IRS will determine if there has been any underpayment.
If they find that you do owe outstanding taxes, you will have to pay substantial penalties and interest on those taxes. In extreme cases, you could even save prosecution for tax evasion. Penalties and interest can drastically increase the amount you owe, which is why it’s so careful to respond proactively to any allegations of underpayment.