Is Tax Evasion a Felony or Misdemeanor?

Tax evasion is a type of tax fraud charge. It refers to illegally and deliberately avoiding paying taxes owed. Because it’s intentional, tax evasion is a criminal offense. Whether it’s charged as a felony or misdemeanor, however, depends on several factors.

In this article, we explore some of these considerations as well as principles underlying this area of law. If you’re facing tax evasion charges, consider speaking with a criminal defense attorney. They can help you understand your options, which may include negotiating a reduction in your charges and/or penalties.

But first, let’s begin by ensuring we understand what tax evasion is.

Tax Evasion

Tax evasion is when people or entities try to avoid paying the taxes they owe to the government. It falls into the white-collar crime category because it’s nonviolent and committed for financial gain.

Tax evasion can involve any type of tax, but it most commonly occurs with income tax.

There are many ways taxpayers might try to evade taxes when they file tax returns. Some common examples include:

• Underreporting income to reduce tax liability
• Claiming undeserved tax deductions or expenses
• Hiding money in secret bank accounts
• Reporting false information or false statements about finances
• Not filing income tax returns at all

Making honest mistakes on your tax return isn’t the same as tax evasion. Tax evasion requires intent. This means the person knew they were breaking the law and did it on purpose.

State and Federal Tax Evasion

Tax evasion can be a state and/or federal crime, depending on the circumstances. In some cases, a party might face both federal and state tax evasion charges.

Federal Tax Evasion

Tax evasion is most commonly prosecuted as a federal crime. Under the federal tax code, tax evasion involves any willful attempt to evade or defeat any tax imposed by federal law. This can be the illegal nonpayment or underpayment of taxes.

Key elements of federal tax evasion include:

• Willfulness: The act must be intentional and deliberate.
• Affirmative act: There must be an action taken to evade taxes, such as filing a false tax return or hiding income.
• Tax deficiency: There must be an actual tax owed that was not paid.

The Internal Revenue Service (IRS) investigates federal tax evasion. The federal government prosecutes federal tax evasion under federal law. However, the IRS doesn’t pursue prosecution in every suspected case. It generally goes after the more severe cases with higher alleged intentionality and evasion amounts.

State Tax Evasion

The states also have their own tax laws for defining and prosecuting tax evasion at the state level. This means that the specifics of what constitutes tax evasion, as well as the penalties, can vary from state to state.

State tax agencies typically investigate these cases. Similarly, state prosecutors try them in state courts under state criminal law.

Felony or Misdemeanor?

Tax evasion can be a felony or misdemeanor charge. A felony is a more serious crime that tends to involve longer prison sentences and larger fines.

The U.S. tax code explicitly defines tax evasion as a felony. This means the federal government considers federal tax evasion a felony. While a federal tax evasion charge doesn’t have to mean a conviction, one can face serious consequences if convicted.

At the state level, tax evasion can be either a felony or a misdemeanor. Its classification depends on the state and the specifics of the case.

Generally, more serious cases of tax evasion involving larger amounts of money or demonstrating clear intent to defraud are more likely to be charged as felonies.

Whether states charge tax evasion as a felony or misdemeanor often depends on:

• The amount of unpaid taxes
• The duration of the evasion
• Prior offenses

In Georgia, for example, willfully evading or attempting to evade $3,000 or less in state taxes is generally a misdemeanor. And more than that is typically classified as a felony. However, the specific charges may vary depending on the circumstances and intent.

Penalties

The penalties for tax evasion are much harsher for felony convictions than for misdemeanors. If convicted, state and federal tax evasion may result in both civil and criminal penalties.

Criminal Penalties

Criminal penalties can include fines and imprisonment. For felony convictions at the federal level, these can include:

• Up to five years in prison
• Fines of up to $250,000 for individuals or $500,000 for corporations

Criminal penalties for felony tax evasion at the state level can vary. In Illinois, for example, these penalties may include:

• Up to seven years in prison
• Fines of up to 50% of the amount of taxes evaded

In Texas, however, these might include:

• Up to ten years in prison
• Fines of up to $10,000

Criminal penalties for misdemeanor tax evasion convictions vary by state. For example, both New York and California can impose up to a year in county jail and/or a fine of up to $1,000. Texas also allows up to a year in county jail, but its fines may go as high as $4,000.

Civil Penalties

Civil penalties are typically financial in nature and don't involve jail time. Generally, tax evasion convictions will require payment of the evaded taxes (plus interest and penalties) as a civil penalty.

For federal convictions, the IRS may also impose civil fraud penalties in addition to criminal penalties. These typically equal 75% of the underpayment that’s attributable to fraud. Additional civil penalties for federal tax evasion can include:

• Failure-to-file penalties
• Failure-to-pay penalties
• Accuracy-related penalties

While these civil and criminal penalties may be imposed for convictions of tax evasion, it’s important to remember that not all charges result in convictions.

Legal Defenses

Your criminal defense attorney may try to contest your tax evasion charges or penalties with a legal defense. If successful, there may be no conviction at all.

Some common defenses to tax evasion charges include:

• Lack of intent: If you didn’t pay taxes or underpaid taxes by accident or due to negligence, this can be a strong defense.
• Insufficient evidence: If the prosecution’s evidence doesn’t prove the elements of tax evasion beyond a reasonable doubt, your attorney may discuss this defense with you.
• Reliance on professional advice: If the errors at issue resulted from your reliance on a tax professional/accountant’s advice, this can be a valid defense.
• Procedural violations: If the IRS violated your constitutional rights during the investigation, you may have grounds to request evidence be thrown out or even dismissal of the criminal charges.

The availability and effectiveness of these and other defenses turns on the case-specific facts. A strong defense can reduce or even defeat tax evasion charges/penalties. Your lawyer will be instrumental in helping you understand these options.

It’s also important to remember that very few criminal cases actually go to trial. In fact, most tax evasion charges in this country are resolved through plea deals.

Plea Deals

A plea bargain, or plea deal, can reduce your charges, penalties, or both. These agreements usually involve pleading guilty in exchange for a reduction. Still, they’re a popular way to avoid the uncertainty of a trial and potentially harsher penalties. 

Getting Legal Help

When determining your best course of action, it’s highly advisable to speak with an attorney well-versed in the tax laws you’ve been accused of breaking.

You can share what’s happened confidentially with a credible criminal defense attorney. They can explain the legal landscape surrounding your charges and help you develop a strong defense.

Navigating tax crime laws can be complicated, but finding the right advisor to guide you through the process doesn’t have to be. Findlaw’s dedicated directory of criminal defense attorneys can give this task a jump start. Just click on your state to view contact information for several lawyers that can help. You can also narrow search results by city if you prefer.

Either way, don’t go on this journey alone. You need to be making informed decisions.

Consider enlisting the services of a trusted advocate who just might be your most important ally at this time.