What is tax evasion? Is it a crime? Tax evasion occurs when an individual or business cheats on their tax return, and yes, it’s a crime. Although there are legal ways to reduce tax bills, tax evasion is when taxpayers use illegal methods to evade paying taxes. Being found guilty of tax evasion could lead to significant fines and multiple years in prison.
If you’re concerned that you may have engaged in tax evasion, it is best to seek legal counsel right away. The attorneys at Damiens Law are experienced in tax law and can help you understand your rights. They’ll guide you through the legal process and help you achieve the best possible outcome.
Key takeaways:
- Tax evasion is a crime involving deliberate actions with the intent to avoid taxes. This can lead to significant fines and jail time.
- Tax evasion is considered a felony offense. It is distinct from legal methods of reducing your tax liability.
- Concerned about possible tax evasion charges? Legal help can protect your rights and guide you through your options.
Read on to learn more about what tax evasion is, how the government can prove tax evasion, what happens if you’re found guilty of tax evasion, what you can do if you think you might be in trouble for tax evasion, and steps you can take to avoid tax evasion charges.
What Is Tax Evasion?
Tax evasion is the avoiding or minimizing of tax liability using illegal means. It can also be defined as the purposeful and illegal attempt to evade being assessed a tax or avoiding the payment of a tax. It’s a crime that is punishable by law, and an individual who is classified as a tax evader can face heavy fines and even time in prison.
Although people often use the terms interchangeably, tax evasion isn’t necessarily the same thing as tax fraud. Tax fraud refers to the broad concept of a taxpayer using improper methods to avoid paying their taxes or obtain a tax benefit they’re not legally entitled to. However, tax fraud can consist of either civil tax fraud or criminal tax fraud and tax evasion is a type of criminal tax fraud.
It’s also important to note that tax evasion is not the same thing as is tax avoidance.
Tax Evasion vs Tax Avoidance
While they may sound similar, tax avoidance is the legal practice of minimizing tax liability within the framework of the tax code. In contrast, tax evasion is the deliberate (and illegal) failure to pay taxes or comply with tax law.
Tax avoidance includes taking advantage of tax deductions and using tax shelters to reduce taxable income and is 100% legal. Tax evasion typically involves underreporting income, claiming excessive deductions, or hiding assets offshore and is 100% illegal.
Different Types of Tax Evasion
There are two main ways to engage in tax evasion:
- Evasion of payment
- Evasion of assessment
Evasion of payment encompasses intentional acts by a taxpayer to hide their assets after learning that they owe a tax. Evasion of assessment covers situations where a taxpayer takes active steps to prevent the IRS from assessing a tax. This can include hiding property from the IRS so they can’t impose a tax on the transaction, claiming false tax deductions, or lying on a tax return by purposely underreporting income. It could also include situations where a taxpayer was required to file a tax return, but deliberately chose not to.
Most taxpayers are required to file tax returns for a given tax year if they’re a certain age and have more than a specific amount in gross earnings. The exact amount usually changes each year, but here are some of the filing thresholds for the 2023 tax year for taxpayers under 65:
- Single filers: earned more than $13,850.
- Married filers (filing jointly): earned more than $27,700.
- Self-employed taxpayers: earned more than $400 in net self-employment income.
If you believe that you don’t need to file a tax return when you don’t owe any taxes (despite earning an income that exceeds the applicable threshold), you’re probably wrong and could theoretically be guilty of tax evasion. Despite this, criminal charges are unlikely. Prosecution for failing to file a required tax return usually doesn’t occur unless it’s also accompanied by other illegal acts, like not paying owed taxes and committing these acts for multiple years.
Although criminal prosecution is unlikely, not filing required tax returns can lead to serious problems. For example, the IRS could file a substitute for return (SFR) on your behalf and conclude you owe taxes when you really owe less than the SFR shows.
Proving Tax Evasion
Being charged with tax evasion is extremely serious, but it happens relatively rarely. According to the United States Sentencing Commission, of the more than 64,000 cases that were reported to it for the 2023 fiscal year, fewer than 400 involved criminal tax fraud.
One of the reasons why so few tax evasion cases get prosecuted is because there are multiple hurdles the IRS and the U.S. Department of Justice (DOJ) must overcome to achieve a conviction.
First, they need to bring charges before the statute of limitation expires. Generally speaking, the federal government has six years to arrest a taxpayer for tax evasion. This six-year clock starts ticking when the last affirmative criminal act by the taxpayer occurs. This sounds like a long time, but the IRS and the DOJ have a lot of other things to do, so by the time something shows up on their radar, there may not be much time left to prosecute a case.
Second, the government must show that the alleged criminal act(s) were willful. This means the taxpayer acted intentionally and the underreporting of tax income or incorrect information on the tax return wasn’t due to a mistake, negligence, or a good faith misunderstanding of the law.
Even if you should have known better about what you could or couldn’t do with your taxes, as long as you honestly believed what you were doing was legal, then you can’t be found to have acted willfully for purposes of tax evasion. The government will often prove intentional conduct through circumstantial evidence, such as the taxpayer changing financial records without a plausible reason or moving assets at key moments during the tax collection or investigation process.
Third, there must be the existence of a substantial tax deficiency or liability as a result of the alleged criminal tax fraud, although federal courts are split on what exactly constitutes “substantial.” For instance, if you lied on your taxes to save $2 on your tax bill, that may not be enough to be found guilty of tax evasion. From a practical matter, the IRS would never refer this type of case to the DOJ for prosecution, as a mistake or computational error is more likely than intentional deception.
The Consequences of Tax Evasion
Tax evasion is a federal crime that can result in substantial fines and even imprisonment. The penalties for tax evasion depend on the severity of the offense but can range from a few thousand dollars to a million dollars and up to five years in prison.
In addition, the IRS can assess a civil penalty equal to 75% of the amount of taxes that were evaded. This penalty is in addition to any criminal penalties that may be imposed. In some cases, you can avoid criminal charges, such as with the Voluntary Disclosure Program.
What Is the Voluntary Disclosure Program?
The Voluntary Disclosure Program (VDP) is a special program offered by the IRS to help taxpayers who have failed to report income or file tax returns. This program allows taxpayers to come forward and voluntarily disclose their tax violations and, additionally, it provides them with some amnesty from criminal prosecution.
Streamlined Versus Traditional
There are two main types of VDP: the Streamlined Procedure and the Traditional Procedure. The Streamlined Procedure is for taxpayers who have relatively simple tax violations, while the Traditional Procedure is for taxpayers who have more serious tax violations.
As nice as VDP is, there are a few things to keep in mind. First, you must voluntarily disclose your tax violations in order to participate in the VDP. Second, you must agree to pay back all taxes and interest, as well as any penalties that may be assessed. Third, you won’t be able to take advantage of the VDP if you have already been contacted by the IRS regarding your tax violations.
If you are interested in participating in the VDP, you can contact the IRS directly or go to their website.
How to Protect Yourself from Becoming a Victim of Tax Evasion
There are a few things you can do to avoid tax evasion prosecution. First, make sure that you’re aware of the different types of tax evasion and how they work. Second, file your tax return on time and accurately. Third, keep track of all relevant financial records, such as invoices, pay stubs, receipts, and bills.
This is especially true if you’re claiming certain deductions, like charitable deductions or home office expenses. Finally, consult with a qualified tax professional to get help with your tax planning, income tax calculations, and compliance. While relying on professional tax advice isn’t technically a defense to tax evasion charges, it’s much harder for the government to prove willful intent to break the law when you have a good faith reliance on professional tax advice.
Can I Be Charged With Tax Evasion If I Make a Mistake on My Return?
No, the IRS will not charge you with tax evasion if you make a mistake on your tax return. Generally, if it’s a small mathematical error, the IRS will correct the issue and send you a notice.
However, that doesn’t necessarily mean that you can claim you made a mistake when the IRS is pursuing tax evasion charges against you. In this situation, you need legal representation.
Work With Experienced Tax Attorneys
If you’re contacted by the IRS about potential tax problems or are under investigation for tax evasion, it’s critical to seek legal assistance immediately. You have to be careful because anything you say or do at that point could serve as evidence for future criminal prosecution.
The attorneys at Damiens Law have years of experience representing taxpayers in criminal and civil tax proceedings. Contact us so we can help you understand your rights and protect your best interests.
