Tax evasion refers to the willful and illegal failure to pay taxes to the federal government. Tax evasion strategies include deliberately underreporting or omitting income, overstating the amount of one’s deductions, keeping two sets of financial records, false accounting entries, claiming personal expenses as business expenses, and hiding income. The IRS Criminal Investigation division is tasked with finding these tax cheats and bringing them to justice. Individuals evade taxes both by misreporting their income or failing to pay taxes owed, which can take the form of either underpaying taxes or failing to pay them at all. The common denominators are intent and the use of illegal means to avoid payment.
What Constitutes Tax Evasion?
In order for the federal government to prosecute tax evasion, it must prove intent. To meet the threshold for intent, the prosecution must prove the following three elements beyond a reasonable doubt:
An unpaid tax liability exists An act by the defendant to evade or attempt to evade a tax The defendant possessed the specific intent to evade a known legal duty to pay
Tax cheats rely on numerous tactics and the complexity of the U.S. tax code to illegally avoid tax payments. For example, waitstaff might underreport their cash tips and file a fraudulent tax return that reflects a lower income than their actual earnings. As long as the income concealment is willful, this behavior constitutes tax evasion.
What Are the Penalties for Tax Evasion?
People found guilty of tax evasion pay a steep price for their deception. Tax evaders must pay the taxes owed plus interest, and may be subject to fines of up to $250,000 for individuals ($100,000 for offenses committed before 1985) and $500,000 for corporations and up to five years in prison. In addition, defendants under investigation for tax evasion often face significant legal expenses.
Tax Evasion vs. Tax Avoidance
Not all tax-minimization strategies are illegal. Legal methods of reducing tax liabilities are called tax avoidance. Individuals may hire tax attorneys or accountants who specialize in leveraging the U.S. tax code to their clients’ benefit. People also legally minimize their taxes through mechanisms like charitable contributions and tax-deferred retirement accounts.
