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Tax Evasion 101: Examples, Penalties, and How to Avoid It at All Costs

tax evasion
Written by Fritz

It has probably crossed everyone’s mind at some point in life, “would the IRS notice if I didn’t file my taxes?” You might skim by for a while, but eventually, the IRS will discover what you’re doing.

Even before the internet and cyber tracking, the IRS noticed and didn’t play nice. Al Capone’s tax evasion penalties include 11 years in federal prison, a $50,000 fine, $7,692 for court costs, and $215,000 plus interest for back taxes for a 1931 conviction.

So what exactly is tax evasion? What is the difference between tax avoidance and tax evasion? Keep reading so you don’t become an IRS target.

What Is Tax Evasion?

The definition of tax evasion is the illegal underpayment or nonpayment of tax. If you deliberately do not pay taxes, you are guilty of a crime. Your charge will be in federal court, and you may incur jail time and penalties.

The IRS can find you guilty of tax evasion even if you don’t file tax forms. The main factor for determining guilt is the agency’s ability to show the avoidance is willful.

Evasion includes finding ways that are legal to reduce your tax obligations. When trying to decide if a taxpayer is evading payment of taxes, the financial situation of the person or business is examined. The investigation reveals if the nonpayment is because the person or entity is committing fraud or concealing reportable income.

Fraudulent concealment includes a person reporting income under a fake name and social security number. In this type of scenario, the person may also be guilty of identity theft.

Other examples of tax evasion include failing to report income that does not follow a traditional payment method. A common term for this is getting paid “under the table.” If you do not report this income to the IRS, you are guilty of tax evasion.

Penalties include jail time of up to five years, fines up to $500,000 for corporations or $250,000 for individuals, plus the cost of prosecution.

Tax Evasion of Assessment

Evasion of assessment means you avoid paying tax by transferring assets to keep the IRS from assessing your correct tax liability. You accomplish this by hiding assets to prevent them from being counted. This deceitful method of underreporting is tax evasion.  

For the IRS to prove you are evading assessment, they must prove it is an intentional act, not an innocent mistake.

Tax Evasion of Payment

When you evade payment, you hide money or assets that you should be paying taxes on. Instead of hiding assets so they are not counted as income and taxed, you hide cash or assets and claim nothing is available to pay tax. For example, depositing funds into a foreign bank account.

The most common type of tax evasion is companies and individuals that misrepresent their income to the government. They underreport how much money they make, inflate their deductions, and hide money in offshore accounts.

Tax evasion also happens when people conduct illegal businesses. If they report the income from unlawful transactions, they admit guilt to criminal activity. If they say the money comes from a legitimate source when it actually came from illegal activity, they may be guilty of money laundering.

Examples of Tax Evasion

You are not guilty of tax evasion if you make an innocent mistake on your tax return, such as misinterpreting the tax code. Under the federal rules, you are not guilty of tax evasion unless there is an affirmative act. You must intentionally evade making a payment or having a proper assessment of assets.

Here are some examples:

  • Creating false invoices
  • Destroying records
  • Filing false tax returns
  • Hiding sources of income
  • Holding property in someone else’s name
  • Keeping two sets of books
  • Overstating your tax deductions

These examples include evasions of both payment and assessment.

Tax Evasion vs Tax Avoidance

When you avoid paying tax, you are using a legal method of lowering your tax obligations to the government. When you evade taxes, you use illegal methods to avoid paying taxes. Examples are on the list above.

You may avoid paying tax if you donate to a charitable organization.

Placing tax-deferred income into a retirement account like an IRA is tax avoidance for the current time. This is legal because you pay taxes when you withdraw funds from the account.

Make sure you avoid these tax mistakes

  • File as soon as you have all documentation
  • Keep track of all information
  • Report all income
  • Don’t miss deductions and credits
  • Don’t ignore health care mandates
  • Double-check all work before submission

Taking action to avoid mistakes helps keep you out of the IRS radar.

Tax Evasion Elements

The elements for proving tax evasion are in the Tax Crimes Handbook. When filing a legal complaint, the elements are what the person filing must prove and must be in the complaint: 

  • An attempt to defeat or evade a tax or evade paying a tax
  • Additional tax is due and owing
  • Willfulness

The person liable for the tax must make an “affirmative act” with the intent of defeating or evading assessment taxes or payment of taxes. This includes filing a false tax return, filing a false amended tax return, concealing money, and concealing assets.

Willfulness means voluntarily and intentionally violating legal duty. Passively failing to file tax returns or pay tax due is not tax evasion if there is no action to conceal or mislead the government.

The government must prove the taxpayer has criminal intent. If the taxpayer has a good faith belief they are not violating tax law, they may show that as an affirmative defense. Claiming that tax laws are unconstitutional is not an acceptable defense.

Tax Evasion Penalties

The penalties for evading taxes are in 26 U.S.C. § 7201 of the U.S. Tax Code. A felony conviction results in fines of no more than $100,000, imprisonment for up to five years, or both. If the conviction is against a corporation, the fines may be up to $500,000.

In addition to the above, anyone found guilty will be assessed prosecution fees.

Avoid Tax Evasion Claims

Tax Relief Professional provides free information so you can make educated decisions regarding finances, tax evasion, and more. We can assist you with tax relief settlement services. Call (877) 469-1651 or fill out our online contact form today to keep the IRS from looking over your shoulders.

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Fritz

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