What Is Tax Evasion?
Tax evasion is an illegal activity in which a person or entity deliberately avoids paying their rightful tax liability. Individuals or organizations caught evading tax obligations often face criminal charges and substantial penalties. Under the IRS tax code, willfully failing to pay taxes is a federal offense.
Key Takeaways
- Tax evasion encompasses both the illegal nonpayment and underpayment of taxes.
- The IRS can determine tax evasion even if the appropriate tax forms have not been submitted.
- Willful intent to avoid paying taxes must be proven for tax evasion charges.
- Unlike tax evasion, tax avoidance leverages legal methods to reduce tax obligations.
Understanding Tax Evasion
Tax evasion covers both nonpayment and underpayment of taxes and does not rely on the submission of tax forms. The IRS can validate owed taxes through third-party data, such as W-2s from employers or 1099s. To invoke charges of tax evasion, the failure to pay must be proven as a willful act. Penalties include not only the repayment of taxes but potentially jail time, fines up to $250,000 for individuals, or $500,000 for corporations, or both, alongside prosecution costs.
What Qualifies As Tax Evasion?
Several factors are considered to establish intentional tax evasion. A taxpayer’s financial background is scrutinized to discern any fraudulent attempts, such as concealing assets by associating them under another person’s details. Using false names and SSNs or taking cash payments without proper IRS reporting are also considered fraudulent acts.
Tax Evasion vs. Tax Avoidance
Tax evasion involves illegal activities to avoid taxes, while tax avoidance employs legal means to reduce tax liabilities. Examples of tax avoidance include giving donations to approved charitable entities or investing income in a tax-deferred retirement account like an IRA, where taxes are deferred until cash withdrawal.
What Are Examples of Tax Evasion?
Illegal activities considered as tax evasion can include:
- Underreporting income
- Claiming unqualified credits
- Concealing assets
- Falsely claiming residency
- Using extensive cash transactions
- Overstating dependents
- Maintaining double business records
How Does the IRS Catch Tax Evaders?
The IRS Criminal Investigation Division leads investigations into potential tax violations. Initiations may emerge from internal red flags such as audit reports suggesting fraud. If preliminary checks show sufficient evidence, special agents collect further evidence via methods like third-party interviews, surveillance, search warrants, and subpoenas. Substantiated cases may progress to prosecution; however, successive reviews might determine insufficient evidence for criminal charges.
Can You Go to Jail for Tax Evasion in the U.S.?
Yes, tax evasion is a federal offense punishable by up to five years in prison, fines up to $250,000 for individuals or $500,000 for corporations, or both.
The Bottom Line
Tax evasion is the illegal act of deliberately nonpaying or underpaying due taxes and subjects those involved to severe consequences such as penalties and imprisonment. It is distinct from tax avoidance, which is the legal practice of reducing tax obligations through means such as investment in retirement accounts or claiming appropriate tax credits.
Related Terms: tax avoidance, tax liability, IRS, fraud, tax credits.
References
- Internal Revenue Services. “Part 9. Criminal Investigations-Chapter 1. Criminal Investigation Mission and Strategies-Section 3. Criminal Statutory Provisions and Common Law-9.1.3 Criminal Statutory Provisions and Common Law”.
- Internal Revenue Service. “Tax Crimes Handbook-Office of Chief Counsel-Criminal Tax Division”, Page 62-90.
- Internal Revenue Service. “The Difference Between Tax Avoidance and Tax Evasion”.
- Internal Revenue Service. “Topic No. 451 Individual Retirement Arrangements (IRAs)”.
- Internal Revenue Service. “Charitable Contribution Deductions”.
- Minnesota Department of Revenue. “Signs of Potential Tax Evasion or Tax Fraud”.
- Internal Revenue Service. “How Criminal Investigations Are Initiated”.
- Internal Revenue Service. “Tax Crimes Handbook”, Page 2.
- Cornell Law School Legal Information Institute. “26 U.S. Code § 7201 - Attempt to Evade or Defeat Tax”.
