Tax Evasion: What Happens if You Don’t Report Your Income?

Tax evasion is the act of deliberately underpaying or avoiding paying your tax liabilities. This can take many forms, including underreporting your income, failing to file taxes, or falsifying financial documents. While similar to tax avoidance, tax evasion is a criminal offense and can lead to severe legal and financial consequences.

Understanding tax evasion and its various consequences is crucial to staying compliant with the IRS and avoiding severe repercussions. That is why, in this article, we’ll discuss the different forms of tax evasion, explain the consequences of non-compliance, and offer tips to help you avoid unintentional mistakes.

Let’s jump in!

Key Takeaways

• Tax evasion is the illegal practice of underpaying or completely avoiding paying taxes.
• Common forms of tax evasion include underreporting or hiding income, creating fake documents, maintaining double books, claiming false deductions, and failing to file tax returns.
• Unlike tax avoidance, which uses legal means to lower taxes, tax evasion is the act of intentionally underpaying taxes.
• Committing tax evasion has several legal, financial, and personal consequences, including potential prison time, increased audits, and difficulties in securing loans.
• To stay compliant and avoid tax evasion, it’s crucial to maintain detailed records of your finances, file your taxes correctly and on time, and stay informed about the changes in tax laws.

What is Tax Evasion?

Tax evasion, or tax fraud, is the illegal practice of not paying taxes owed to the IRS. This can affect both individuals and businesses and is subject to severe penalties. Moreover, since this is a criminal offense, any individual found guilty of tax evasion faces jail time with a maximum of five years and has to pay the corresponding fine.

That said, tax evasion only refers to intentional attempts to avoid payments, so if you make a mistake when paying or filing taxes, you don’t have to worry as long as you have proof that it wasn’t done on purpose. To avoid accidentally committing tax evasion, it’s crucial to be familiar with its different types.

6 Different Forms of Tax Evasion

From creating fake documents to underreporting income, there are different forms of tax evasion that you should avoid.

Let’s discuss each one in detail:

#1. Underreporting Income

One of the most common forms of tax evasion is reporting income lower than your actual earnings in an attempt to lower taxes.

For instance, a landlord might only report rent payments received via check or bank transfers and not payments made in cash to make it seem like their income is much smaller. While this may seem like an easy way to lower taxes, if the IRS discovers the discrepancy, you may face accuracy-related penalties amounting to 20% of the total tax owed.

Other acts of underreporting income include omitting wages from certain side gigs and not reporting freelance work.

#2. Hiding Income

Similar to underreporting income, hiding or having unreported income is another form of tax evasion. People often do this by using offshore accounts or fund transfers to relatives to evade tax reporting. That said, not all offshore accounts are illegal, and if you use a foreign bank account to receive wages, it won’t be considered tax evasion as long as you report them.

#3. Creating Fake Documents

Creating fake documents or altering legitimate documents to manipulate your income and lower tax liabilities is a form of tax evasion common among businesses. Business owners may sometimes falsify receipts and invoices to reduce taxable income or make them eligible for certain deductions.

That said, creating fake documents also constitutes fraud, and if you’re wondering whether the penalty for tax fraud vs. tax evasion is the same, the answer is no. Falsifying documents could result in a fine of up to $100,000 and a three-year prison sentence.

#4. Having a Double Set of Books

Part of small business tax compliance is maintaining a detailed record of all earnings, but some individuals keep two sets of financial records to misrepresent income. For instance, a business owner might use one book to keep an accurate record of all their transactions but use the second book with a lower revenue when filing their taxes.

#5. Claiming False Deductions

This form of tax evasion involves individuals who falsify tax deduction claims to lower their taxable income. For instance, a business owner may write off personal vacations as business expenses to make them eligible for tax returns.

#6. Not Filing Taxes

The last form of tax evasion you need to be careful of is not filing taxes completely, even if it’s done by accident since this can lead to hefty fines on top of possible jail time.

According to the IRS, individuals who fail to pay their taxes on time will be subject to a 5% penalty of their total tax owed for every month past the due date up to 25%. This fine applies to both business income and self-employment taxes. So, if you forget to file your taxes, make sure to correct this as soon as possible to avoid further penalties.

The Consequences of Tax Evasion

While you may think that it’s easy to get away with not paying taxes properly, you can end up facing serious tax evasion consequences that range from legal and financial losses to personal repercussions.

Here’s what each consequence entails:

• Legal consequences. The legal punishment for tax evasion involves the corresponding fines and penalties along with potential prison time of no more than five years.

• Financial consequences. Aside from the immediate legal consequences, tax evasion will also have financial repercussions for businesses since, in addition to the initial fines, they would also need to pay the interest on their unpaid taxes. The IRS may also place tax liens on your assets or even seize your property to cover the amount owed.

• Personal consequences. Being found guilty of tax evasion will also damage your company’s reputation and lead to a loss of trust from clients, partners, and financial institutions.

Tax Evasion vs. Tax Avoidance

The difference between tax evasion and tax avoidance is that the former is the illegal attempt to avoid paying taxes, while the latter refers to using legal means to lower tax liabilities.

Some tax avoidance strategies include claiming tax credits, making charitable donations, and reviewing potential IRA opportunities. These strategies allow individuals to enjoy higher savings by helping reduce their taxable income.

However, tax avoidance can also be illegal, especially when an individual intentionally ignores tax laws, such as by claiming deductions they aren’t eligible for, so it’s important to be careful when filing to avoid unintentionally committing tax evasion.

5 Key Tips to Avoid Tax Evasion

To avoid tax evasion and its corresponding penalties, here are five key tips you should keep in mind:

#1. Maintain Your Records Regularly

By maintaining accurate and up-to-date financial records through pay stubs, invoices, and other documents, you can have a clear idea of exactly how much you earned for the year so you can file taxes properly. Regular bookkeeping also makes tax filing easier by allowing you to track all your deductions, helping you avoid discrepancies that can raise red flags for the IRS.

#2. File Correctly and on Time

Even if you aren’t planning to commit tax evasion, incorrect or late tax filings will still be subject to penalties and interest charges. So, make sure you double-check all your calculations, confirm that all your sources of income are accurately reported, and submit all the necessary tax forms before the deadline.

#3. Use Online Tools

To help streamline tax preparation, you can use legal tax compliance tools like Paystub.org to easily generate the required forms like W-2 or 1099. Our 1099 generator has all the information you need to ensure proper tax filings—all you need to do is input the correct amount, and it will automatically calculate your taxes for you.

#4. Stay Informed About Tax Laws

One of the best freelance tax tips you should keep in mind is to stay informed about the current tax laws to prevent unintentional violations. Make sure to check the IRS website occasionally or to keep up with the updates from your local tax authority to learn about new regulations and requirements.

#5. Hire a Professional

If you’re unsure about certain deductions or how to file taxes for contractors, for instance, don’t hesitate to hire a professional to prevent any filing mistakes. Tax professionals and accountants thoroughly understand tax laws and can help you maximize deductions while staying compliant with IRS regulations.

Final Thoughts

Tax evasion is a federal offense that can lead to serious legal and financial consequences. Because of this, it’s crucial to stay informed about tax laws and their most recent updates to maintain payroll tax compliance and avoid unintentionally committing tax evasion.

Another way to avoid tax evasion is by using Paystub.org’s 1099 and W-2 form generator to create professional forms to use during tax time. These tools use standardized templates to reduce the risk of errors and ensure timely submissions. You can also use Paystub.org for invoice and paystub generation for accurate tax filings.

Tax Evasion FAQ

#1. What is the most common form of tax evasion?

The most common form of tax evasion is underreporting income. This happens when individuals or businesses try to reduce their taxable income by reporting a much smaller amount than their total earnings.

#2. Can you go to jail for tax evasion?

Yes, you can go to jail for tax evasion, as it is a criminal offense. According to the United States Sentencing Commission, the average sentence for tax fraud offenders is 16 months.

#3. What happens if I don’t file my W-2 or 1099 forms?

If you don’t file your W-2 or 1099 forms, you will be subject to IRS audits and penalties along with additional interest on your unpaid taxes. You may also unintentionally commit tax evasion by underreporting your income.

#4. How can I stay compliant with tax laws as a freelancer or contractor?

To stay compliant with tax laws as a freelancer or contractor, make sure to keep detailed records of all your income and expenses, file your taxes properly, and stay informed of all the changes and updates to current tax laws.