Tax evasion is the practice of not paying your taxes. This is a serious crime if it is not remedied appropriately.
The act of tax evasion is when an individual commits an act intended to defraud the Internal Revenue Service (IRS). Tax evasion has a very broad definition. It allows the IRS to go after an individual for almost any knowing misstatements on their taxes.
Tax evasion typically involves an individual or corporation misrepresenting their income to the IRS.
Misrepresentations may involve actions such as:
- Underreporting yearly income;
- Inflating deductions;
- Hiding taxable money; or
- Transferring funds to offshore accounts.
- What Are Some Examples of Tax Evasion?
- There are numerous tax evasion examples.
These include:
- Personal income tax evasion, which occurs when an individual falsifies income or other factual data;
- Business tax evasion, which occurs in connection with a business and may include:
- Claiming false deductions;
- Deliberately underreporting or omitting income;
- Overstating the number of deductions;
- Keeping more than one set of books, or making false statements in books and records;
- Claiming personal expenses as business expenses; or
hiding or transferring assets or income;
- Employment tax evasion, which occurs in an employment setting and may include:
- Failure to pay employment taxes;
- Falsifying payroll;
- Pyramiding;
- Employment leasing; or
- Paying employees in cash.
When Must the IRS Charge You with Tax Evasion?
The IRS can pursue any misstatement on an individual’s tax return for six years. The IRS can audit a person at any time.
The IRS must prove the following in tax evasion cases:
- An unpaid tax liability exists;
- The defendant committed some act to attempt to hide their taxable income and dodge paying taxes on their money;
- The defendant had specific intent to dodge paying taxes that they had a legal duty to pay; and
- The jury must find the defendant, or the accused individual, guilty of each element beyond a reasonable doubt.
What Are the Criminal Penalties For Tax Evasion?
Tax evasion is a crime in the United States. The crime is punishable by imprisonment, substantial monetary penalties, or both.
Tax evasion can result in harsh punishments, including:
- Fines as high as $250,000 for individuals and $500,000 for corporations;
- A 75% civil penalty;
- Criminal charges, including imprisonment of up to 5 years; and
- Attorney’s fees and court costs.
What Is Tax Fraud?
An individual or business commits tax fraud when they falsify information on their tax return to avoid paying their full tax liability. The US tax system relies on voluntary compliance or self-assessment; the IRS seeks to discourage tax fraud by publicizing convictions, seeking prison sentences for offenders, and assessing fines, penalties, and civil taxes.
What Are Some Examples of Tax Fraud?
Willful and intentional violations of the tax code constitute tax fraud.
Here are some examples:
- Claiming a false deduction;
- Claiming a personal expense as a business expense;
- Not reporting earned income;
- Intentionally failing to file an income tax return;
- Willfully failing to pay taxes due;
- Intentionally failing to report all income received; and
- Preparing and filing a false tax return.
What Is the Difference Between Negligence and Income Tax Fraud?
Income tax fraud differs from negligence. Tax law is a complex set of rules and regulations that are difficult for most people to understand.
So long as there are no other indications of fraud, the IRS typically assumes that a careless error was an honest mistake rather than an intentional violation of the tax code. The tax auditor may consider the mistake negligent in some cases. Under IRS rules, even unintentional violations can result in a fine of 20% of the underpayment.
Tax auditors look for certain types of suspicious and fraudulent activity in order to distinguish between negligence and willful violations, including:
- The use of a false Social Security number;
- Falsifying documents;
- Concealing or transferring income;
- Claiming too many deductions and exemptions; and
- Willfully underreporting income.
What Is Tax Avoidance?
Deferring income from one year to another, for example, is an example of tax avoidance.
How Can I Avoid or Minimize Taxes?
Taxes can be minimized or eliminated in several ways:
- Income Deferral
- Tax Deductions
- Charitable Contributions
Income Deferral
Receiving income after midnight on December 31st allows the income to be taxable for the new year and need not be claimed on the current year’s tax return.
Tax Deductions
Tax deductions are items you can deduct from your tax bill.
The following are both “above-the-line” and “below-the-line” deductions:
- Casualty and Theft Losses
- Charitable Contributions
- Interest
- Medical and Dental Expenses
- Miscellaneous Itemized Deductions
- Other Taxes
Charitable Contributions
You may deduct contributions to qualified charitable organizations if the deduction does not exceed 50% of your adjusted gross income. The excess deductions can be carried forward to the next five taxable years. Standard and itemized deductions are not included in your adjusted gross income, but your income is adjusted downward by specific deductions.
What Are the Penalties for Income Tax Fraud?
There may be severe penalties for income tax fraud. Taxpayers who willfully avoid paying their income taxes are subject to criminal and civil penalties. The type of penalty assessed will depend on the type of fraud. Below are two examples of tax fraud.
An individual convicted of evading or defeating taxes is guilty of a felony.
Additionally, they are subject to the following penalties under the law:
- Imprisonment for no more than five years;
- A fine or not more than $250,000 for individuals or $500,000 for corporations; or
- Both penalties, along with the cost of prosecution.
A taxpayer who commits fraud and false statements is guilty of a felony.
Taxpayers are subject to the following penalties:
- Imprisonment for no more than three years;
- A fine of not more than $250,000 for individuals or $500,000 for corporations; or
- Both penalties, along with the cost of prosecution.
What Is the Difference Between Negligence and Tax Evasion?
In negligent tax errors, an individual makes a careless mistake without intending to defraud the IRS. Most individuals do not realize they have made a mistake until they are informed.
It is not a crime to make a negligent tax error. Penalties could, however, be imposed on the taxpayer.
On the other hand, a taxpayer commits tax fraud when they intentionally commit an act with the intent of defrauding the IRS.
When someone commits tax fraud, they know they are defrauding the IRS. They commit these acts knowing they could face the consequences if prosecuted and convicted.
What Are Possible Defenses If I Am Accused of Tax Evasion?
Tax evasion is a crime, but there are several defenses to it. In some cases, they are similar to defenses for other kinds of crimes.
Among them are:
- Insufficient evidence;
- Statute of limitations;
- Entrapment;
- Mistake;
- Insanity; and
- Intentional conduct.
The government must prove that the taxpayer intended to evade the IRS and not pay their taxes and that they knew the consequences of their actions. Governments cannot prevail on their claim if they cannot prove intent.
What Can You Do If You Are Accused of Tax Evasion?
If you have been accused of Tax Evasion or are facing an audit, you should speak to a tax lawyer immediately to learn more about your rights, defenses, and the complicated legal system.
