What Is Tax Evasion?
The tax code is extremely complex, so it’s not a surprise when mistakes are made on tax returns. That’s not a crime. But purposefully under-reporting income or claiming deductions you’re not entitled to receive is tax evasion, and it’s a serious offense.
The IRS defines tax evasion as the failure to pay or the deliberate underpayment of taxes. Anyone found guilty of tax evasion faces hefty fines, prison time, or both. Let’s take a closer look at what is tax evasion so you know where to draw the line.
Two Types of Tax Evasion
The IRS recognizes two different forms of tax evasion: evasion of assessment and evasion of payment. If a person transfers assets to prevent the IRS from determining their true tax liability, they have attempted to evade assessment. If a person hides their assets after a tax becomes due and owing, an attempt to evade payment has occurred.
Evasion of Assessment
The taxpayer must perform some action that is focused on defeating the assessment of a tax. Requires more than a proof of negligence. An intentional under-reporting qualifies as an attempt to evade.
Evasion of Payment
Affirmative acts to evade payment generally involve concealment of money or assets with which the tax could be paid. Such an act could also take the form of removing the assets from the reach of the IRS, such as in a foreign bank account. Simply failing to pay taxes owed, is not evasion of payment. An example of evasion of payment is concealing assets in a family member’s bank account.
Examples of Tax Evasions
Having errors on your return or unpaid taxes is not enough for a finding of tax evasion. The federal rules state that a person with a tax deficiency is guilty only when there’s an affirmative act to evade the assessment or payment of taxes. Plus, that affirmative act must be intentionally performed.
Here are some actions that federal courts have found to be tax evasion:
- Filing a false return
- Keeping a double set of books
- Making false invoices
- Concealing sources of income
- Destruction of records
- Holding property in another person’s name
- Overstating deductions
Elements of the Crime
The crime of tax evasion is a felony, regardless of the amount owed. Cheating on a small scale does not make the crime any less serious. For a conviction, the United State Attorney must prove beyond a reasonable doubt every element of the offense.
The two forms of tax evasion share the same basic elements:
- An attempt to evade assessment, or the payment of a tax: The taxpayer must have performed an “affirmative act” to evade assessment or payment of a tax. This means the government must prove you intentionally did something to avoid your taxes.
- A tax is due and owing: You can’t be found guilty of evading taxes that you don’t legitimately owe. The government has the burden to prove that a tax is owed.
- Willfulness: This is the voluntary, intentional violation of a known legal duty. The taxpayer’s good faith belief that no tax law violation has occurred is not a defense.
Penalties for Tax Evasion
Tax evasion is punishable by up to five years in prison, a fine of as much as $250,000, in addition to the payment of any taxes owing. Here are some common criminal penalties for specific types of tax evasion:
- Not Filing a Return: This offense that generally carries civil tax penalties. In extreme cases, there can be up to one year in prison and $100,000 in fines for each tax year not filed.
- Filing a Fraudulent Return: A criminal felony that carries up to 3 years in prison and $100,000 in fines.
- Misrepresent or Conceal Financial Information: A criminal felony with a maximum penalty of 5 years in jail and $100,000 in fines.
- Failing to Pay Taxes: A felony offense with penalties of up to 3 years in prison and $250,000 in fines.
Get Legal Help with Your Tax Evasion Case
Don’t get bullied by the I.R.S. or state tax agency. Convictions for tax evasion come with significant financial penalties. If you’re under investigation or charged with tax evasion or other tax-related crime, it’s in your best interests to contact a local tax attorney to represent your interests and advocate on your behalf.