Tax laws in New York State are extremely complex, and the processes and procedures required to reach compliance can sometimes be unclear for individuals, organizations, and businesses.
The IRS estimates the federal tax gap, the difference between taxes owed and taxes actually paid on time, at $696 billion a year for tax year 2022. That is the most recent IRS projection (IRS Tax Gap estimates). If you are unclear about tax laws or are facing tax-related charges, a New York tax lawyer can support you.
Tax avoidance and tax evasion are two critical, distinct concepts that are relevant for all taxpaying citizens and business owners. Understanding the difference between the two can help you manage your taxes within local, state, and federal rules and regulations, as well as avoid or fight against any current charges.
Understand the Definitions: Tax Avoidance vs. Tax Evasion
Both tax avoidance and tax evasion lead to individuals paying less or no taxes. Tax avoidance is a legal method to avoid paying certain taxes that is within local, state, and federal policy compliance.
You can avoid being charged or convicted for tax evasion by reporting all of your income, keeping clear records of your financial transactions, and ensuring that you are eligible for certain credits and tax deductions.
Tax evasion is considered to be an illegal method to reduce or pay no taxes. Tax evasion occurs when people avoid paying taxes by not reporting all or a part of their income to the Internal Revenue Service or by being dishonest about their particular financial situation.
New York prosecutes tax evasion as a crime under New York Tax Law Article 37, while the federal government prosecutes it under 26 U.S.C. Section 7201.
The Basics of Tax Evasion
To be convicted of tax evasion, a person must have willingly broken the law. This can involve failing to report income earned through illegal activity, such as drug dealing, or failing to report legally earned income.
Tax evasion can be considered withholding information, manipulating financial records, or hiding money. Most people sentenced for federal tax fraud do go to prison. Many tax problems, though, never become criminal cases and end with back taxes, penalties, and interest.
The Basics of Tax Avoidance
As mentioned previously, tax avoidance is a legal way to pay less or no taxes. In tax avoidance, individuals report all their earnings and income, then claim deductions strategically to minimize the taxes they pay.
You should keep enough records to show the IRS your entire financial situation and tax-break eligibility.
Examples of Tax Evasion
Notorious examples of tax evasion include white-collar crimes, such as millionaires smuggling their money via offshore accounts. While this form of tax evasion does occur, individuals more often avoid paying certain taxes through simpler illegal means.
For example, many people may be surprised to learn that not reporting under-the-table income to the IRS, such as babysitting money, can be treated as tax evasion if it is done on purpose. However, the IRS generally tries to catch wealthier individuals who evade taxes so it can collect more money.
People who report tax evasion worth more than $2 million may qualify for an award under the IRS Whistleblower Program.
Examples of Tax Avoidance
By putting your money away in retirement accounts, such as a 401(k) or other pre-tax accounts, you can significantly reduce the amount of taxes that you will pay. Additionally, if you are married or have dependent children, you may be eligible for certain tax breaks.
Individuals who own rental properties can also claim tax breaks for expenses related to repairs, depreciation, and property taxes. This can drastically reduce the rental income you pay tax on.
If you are unsure whether your tax avoidance strategy is illegal or you’re facing tax evasion charges, a New York tax lawyer or criminal defense lawyer can help.
How IRS Criminal Investigation Cases Start
IRS Criminal Investigation (IRS-CI) handles federal tax crimes, and not every case begins with an audit. Common starting points include:
- Audit referrals: A civil examiner spots signs of fraud and refers the file to IRS-CI.
- Tips: Whistleblowers, ex-spouses, former employees, or business partners report suspected evasion.
- Bank reports: Currency Transaction Reports and Suspicious Activity Reports flag unusual cash activity.
- Other agencies: Investigations into unrelated crimes can uncover unreported income.
- Data matching: IRS systems compare returns against W-2s, 1099s, and other third-party records.
Often, the first sign of a criminal case is an unannounced visit from special agents. If that happens, speak with a tax lawyer before answering any questions.
Penalties for Tax Evasion in New York
Under the state’s tax fraud statute, New York classifies criminal tax fraud by how much tax a person is accused of evading. The charge can range from a misdemeanor to a serious felony depending on the dollar amount involved:
- Fifth degree: a class A misdemeanor, which applies when someone acts with intent to defraud, no matter how much tax is owed.
- Fourth degree: a class E felony when the tax evaded exceeds $3,000.
- Third degree: a class D felony when the tax evaded exceeds $10,000.
- Second degree: a class C felony when the tax evaded exceeds $50,000.
- First degree: a class B felony when the tax evaded exceeds $1,000,000.
Federal tax evasion, charged under the federal tax evasion law referenced above, is always a felony. A conviction can carry up to five years in prison and a fine of up to $250,000 for an individual or up to $500,000 for a corporation, plus the cost of prosecution.
Someone facing both state and federal scrutiny for the same conduct needs a defense strategy that accounts for how the two systems overlap.
What Happens During an IRS or New York State Tax Audit
An IRS or New York State Department of Taxation and Finance audit starts as a civil matter. Auditors review receipts, bank records, and tax returns to check whether the numbers reported match the income earned. Most audits end with a bill for back taxes, penalties, and interest, not criminal charges.
An audit can turn into a criminal investigation when the auditor finds signs of intent, such as hidden bank accounts, falsified records, or a pattern of unreported cash income. At that point, the case moves from the civil audit team to a criminal investigation division, and the stakes change from a tax bill to potential jail time.
Anyone contacted for an audit who is worried the inquiry could turn criminal should speak with a tax lawyer before answering further questions or turning over records.
Frequently Asked Questions
Can I Go to Jail for Tax Avoidance in New York?
No. Legal tax avoidance is not a crime. But if the IRS or the state decides a strategy crosses the line, you can owe back taxes and penalties, and serious cases can lead to charges. Tax avoidance is a legal method of reducing the amount of taxes that you pay each year. If you are facing charges related to tax matters, it is important to seek counsel from an experienced New York tax lawyer.
How Does the IRS Catch People for Tax Evasion?
The IRS will typically go after higher-income individuals who have submitted tax returns that elicit suspicion. They will conduct thorough audits to authenticate all of the information that has been submitted in the tax returns. In order to do so, they will work closely with other organizations within the government, as well as financial and banking institutions.
What Are Common New York Tax Evasion Examples?
Tax evasion can take many different forms and includes either the hiding of money, the underreporting of income, or the falsifying of records. Specific examples that commonly lead to charges include underreporting by not reporting any money made through a side job that may have been off the books. Additionally, another form of tax evasion is filing for certain deductions for which you are not eligible.
Is Overstating Business Expenses in New York Tax Evasion?
Yes, if you overstate expenses related to your business, then there is likely reportable taxable income that should have been taxed. Writing off personal expenses, such as home renovations, vacations, and dinners that are not associated with the business, is against the law in New York and can constitute tax evasion. Consequences could include time in jail or prison and paying fines, taxes, and interest.
Do I Need a Tax Lawyer or an Accountant for an IRS Audit in New York?
An accountant can help organize records and respond to routine audit questions, but once an audit raises the possibility of criminal charges, a lawyer’s attorney-client privilege becomes important. Communications with an accountant are generally not protected the same way, which means those records and statements can be used against you later. If you sense an audit is turning into a criminal inquiry, bring in a tax lawyer to protect what you say and submit.
Get the Legal Tax Support That You and Your Business Need
If you have been charged with tax evasion or are currently facing IRS audits of your tax returns, it is crucial to get in touch with an experienced tax lawyer. That lawyer can help defend your case.
At the Law Offices of Robert Tsigler, PLLC, our tax team understands that tax evasion charges can be extremely serious and have an impact on the rest of your life. Therefore, we work tirelessly to pursue the strongest possible outcome for your case.
Attorney Robert Tsigler is admitted to practice in the U.S. District Courts for the Eastern, Southern, and Western Districts of New York, the same federal courts where federal tax evasion cases are prosecuted. He also holds an Avvo 10.0 Superb rating and a Martindale-Hubbell Client Champion designation.
Contact one of our NY tax lawyers today to learn more about how you can fight your tax-related charges.
