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 intentionally under-reporting taxable income or claiming deductions you're not entitled to receive is tax evasion, and it's a serious offense.

The Internal Revenue Service (IRS) defines tax evasion as the failure to pay or the deliberate underpayment of federal income taxes. Anyone found guilty of tax evasion faces hefty fines, prison time, or both. Let's take a closer look at what tax evasion is so you know where to draw the line.

Two Types of Tax Evasion

Tax evasion is defined under U.S.C. Title 26, Section 7201, which lists 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 owed, an attempt to evade payment has occurred.

Evasion of Assessment

The taxpayer must perform some action focused on defeating the assessment of a tax. This requires the IRS to do more than prove you were negligent. An intentional under-reporting qualifies as an attempt to evade assessment.

Evasion of Payment

Affirmative acts to evade payment generally involve the concealing of money or assets with which the tax could be paid from tax authorities. Such an act could also take the form of removing assets from the reach of the IRS, such as moving reported income into a foreign bank account in a country recognized as a tax haven. Non-payment of taxes owed is not evasion of payment.

Evasion vs. Avoidance

While they both sound like you are doing something wrong, there is a big difference between tax evasion and tax avoidance. While tax evasion is illegal, tax avoidance simply means taking actions permitted under the U.S. tax system to minimize your tax bill or reduce your tax rate. Tax avoidance includes taking advantage of tax deductions and tax credits, investing in tax-advantaged retirement accounts, and structuring your business affairs to minimize the tax you must pay.

Examples of Tax Evasion

The IRS finding that you made errors on your return or had unpaid taxes during an audit is not enough to find you have committed a tax crime. The federal rules state that a person with a tax deficiency is only guilty of illegal activity 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 real estate or property in another person's name
• Overstating deductions
• Using credit cards to access accounts the taxpayer held in other people's names

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 IRS must conduct a criminal investigation, and the United States Attorney must prove every element of the offense beyond a reasonable doubt.

The two forms of tax evasion share the same basic elements:

1. An attempt to evade assessment or the payment of a tax: The taxpayer must have performed an “affirmative act" to evade the assessment or payment of a tax. This means the government must prove you intentionally did something to avoid your taxes, such as filing false tax forms or participating in a tax evasion scheme.
2. A tax is due and owed: You can't be found guilty of evading taxes that you don't legitimately owe. The government has the burden of proving you failed to pay the amount of tax you are required to pay under the Internal Revenue Code.
3. 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 and a fine of as much as $250,000, in addition to the payment of any taxes owed. Here are some common criminal penalties for specific types of tax evasion:

• Not filing a return: This offense is generally punished through 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 three years in prison and $100,000 in fines.
• Misrepresenting or concealing financial information: This is criminal felony tax fraud with a maximum penalty of five years in jail and $100,000 in fines.
• Failing to pay taxes: A felony offense with penalties of up to three years in prison and $250,000 in fines.

Tax Evasion by Businesses

When most people think of tax evasion, they think of an individual not paying taxes on their personal income. However, small businesses are responsible for a significant amount of the tax evasion that takes place in the U.S. For example, businesses may fail to report income from sales. Or they may not pay a state or local government all of the sales taxes collected from customers. They may also commit tax fraud by failing to collect and pay over the Social Security and other payroll taxes they are required to collect.

Get Legal Help With Your Tax Evasion Case

Don't get bullied by the IRS or state tax agency. Convictions for tax evasion come with significant financial penalties. If you are under investigation or charged with tax evasion, or other tax-related crimes, it's in your best interests to contact a local tax attorney to represent and advocate on your behalf.