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Line between tax avoidance and evasion can be blurry

Golfer Phil Mickelson recently griped that he paid 62 or 63 percent of his income in taxes.

Harry How/Getty Images

Golfer Phil Mickelson recently griped that he paid 62 or 63 percent of his income in taxes.

NEW YORK — Most people think they pay too much in taxes and will do their best to avoid them, but few take that a step further into illegal tax evasion.

Many simply complain to anyone who will listen. Phil Mickelson, the professional golfer, did just that a few weeks ago when he finished a tournament and griped that he paid 62 or 63 percent of his income in taxes. Something was going to have to change, he said. His fans were probably more sympathetic before they learned he made $47.8 million last year.

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In reality Mickelson, a resident of high-tax California, probably either misstated his actual rate — the federal government gives credits for state and local taxes — or he has the world’s worst accountant.

For some other people, the line between legal and illegal tax strategies gets blurred. Or they disregard it.

Marie Estelle Curran, a widow in Palm Beach, Fla., has found herself crossing the line of legality. She inherited a Swiss bank account from her husband worth $43 million at its peak. She did not disclose this to the Internal Revenue Service for nine years — her husband had not informed the IRS either. That was bad; worse was that she had moved the money from one bank to another, even seeming to set up a shell company in Panama.

Those actions told the IRS that she was aware of the account. She is set to be sentenced next month and could face six years in prison, at age 79, having already paid half of the balance of the account in back taxes to the IRS.

‘‘We all tailor our notion of fairness to our self-interest,’’ said Meir Statman, a professor of finance at Santa Clara University in California and the author of ‘‘What Investors Really Want,’’ which has a chapter on great tax cheats. ‘‘People will tell themselves that I evade taxes because the government wastes it or there are people who evade even more taxes than me. People get themselves into tricky tax situations because of their anger at what they perceive as unfairness.’’

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Today’s highly politicized tax atmosphere ensures that Mickelson and Curran come off badly in the public eye and suggests that legal tax avoidance and illegal tax evasion have a future. As far as evasion goes, where is the most peril?

It is fairly difficult to evade taxes on legitimate investments because the IRS can crosscheck the forms supplied by the company and the individual. Where people run afoul of the law is when they cut corners.

One of the most brazen tax dodges is not declaring income. This is difficult for anyone who receives a W-2 or 1099 form for money earned. The IRS receives those forms, too.

But for people in businesses that are cash-based, the temptation to cut corners and the belief that they will get away with it can be great.

‘‘I’ve got one right here on my desk,’’ said Maurice M. Glazer, chief executive of Glazer Financial Network in Dallas. ‘‘It’s a restaurant, and they’re already under audit. They’ve diverted the cash and put it into the backyard. You can’t divert income.’’

Robert A. Mathers, a tax lawyer and certified public accountant at Davis & Kuelthau in Milwaukee, said a taxpayer’s risk of being audited for overstating deductions depends on how the income and deductions are scored on the IRS’ ‘‘discriminant function.’’ That is the agency’s secret computer program to determine the likelihood that someone is cheating and how much money could be collected from an audit.

This year, Mathers said, he was preparing for people who pushed in several areas. One is refundable credits — like the earned income credit for people with children — an area where the IRS is increasing scrutiny.

Problems arise when people provide only partial support for nieces and nephews, or any amount for children who do not exist.

The penalties for pushing tax avoidance into evasion depend on the severity of the offense.

‘‘There’s a fine line between conduct that rises to a potential charge for tax evasion and activities that don’t rise to tax evasion,’’ James N. Mastracchio, the co-chairman of BakerHostetler’s national tax controversy practice. ‘‘It comes down to burden of proof. There has to be willfulness.’’

The penalties for criminal tax fraud are the most severe. This is where the most egregious Swiss bank account cases fall, like the ones when a person created a series of shell companies to mask the ultimate owner of an account. Penalties here include jail time.

The penalties for civil fraud are monetary and structured on a sliding scale, depending on the severity of the offense. These penalties do not include legal and accounting fees to prepare a defense. Glazer said his firm is completing a case with two doctors who simply spent more than they could afford and fell behind on taxes by about $600,000. Because there was no fraud, they were able to work out a deal with the IRS on taxes and penalties. Glazer said his firm charged them about $25,000.

An easy solution to all of this might seem to be a simplification of the tax code. When that happened in 1986, the demand for tax shelters dried up. But lawyers interviewed for this article said tax rates were not the primary impetus for tax cheats.

‘‘I don’t think it’s higher tax rates that spur people,’’ Mastracchio said. ‘‘I think it’s about conduct. Unfortunately, there are people who take stances that they know are incorrect.’’

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