What Is Tax Evasion? Overview and FAQs for Taxpayers
Examples and Consequences of Tax Evasion
Tax evasion is when you willfully mislead the Internal Revenue Service to avoid having a tax assessed against you. It also includes taking illegal actions to avoid paying your tax.
Tax evasion is a serious crime. Felony tax evasion can lead to very high fines and time in prison. If you think you have committed tax evasion, you need to reach out for help today. A tax evasion lawyer can help you assess your situation and get the legal protection you need.
Deliberately underpaying or attempting to hide your assets is known as tax evasion, and it is a crime. The list of reasons for not wanting to pay taxes is long, but the IRS won’t care much about your reasons. Any willful action you take to deliberately avoid or attempt to evade paying your legitimate tax bill can be construed as tax evasion.
Wondering if you committed tax evasion? Not sure if what you did was a mistake or a crime? Haven’t filed taxes for years and worried that the IRS is going to come after you? If you’re not clear about how the IRS would view your tax case contact a tax evasion lawyer for a free case review. They can talk with you about your situation and answer your initial questions.
It matters not, why you didn’t file tax returns or that you concealed your assets; what matters is getting your tax filings back to good standing with the IRS right now so you don’t end up dealing with consequences that could truly change your life.
What Is Tax Evasion?
Tax evasion is a willful attempt to evade the assessment or payment of taxes. That’s the technical tex evasion definition. But what does that actually mean? Let’s take a look at the definition of tax evasion and the different types.
To put it simply, evading the assessment of tax is when you lie on a tax return to reduce how much you owe. Say that your business earns $250,000, but you only report $100,000 on your tax return. That artificially reduces your taxable income and lowers your tax bill.
Evading the payment of tax is when you engage in willful behavior to get out of paying tax. For instance, if you fled the country without paying a tax bill, that could be considered tax evasion. However, the details depend on the situation.
Types of Tax Evasion
To get a better sense of the answer to what is tax evasion? You need to look at the types of tax evasion. Tax evasion is a broad term that can refer to several actions. But as indicated above, tax evasion falls into two main categories: evading tax assessment and evading tax payment.
Generally, true tax evasion involves the taxpayer — whether the taxpayer is an individual or a business — lying about their taxable income, concealing taxable assets from the IRS, or avoiding paying what they truly owe. Keep reading for more examples.
Examples of Tax Evasion: Different Forms of Tax Evasion
There are two main types of tax evasion, but there are a broad number of actions that can fall into these categories. The following are some common examples of tax evasion:
- Underreporting income.
- Exaggerating tax deductions.
- Claiming credits you’re not legally supposed to claim.
- Making up dependents and putting them on your return.
- Transferring assets to others to avoid paying tax.
- Hiding income or assets to reduce your tax bill.
- Holding property in someone else’s name.
- Hiding sources of income.
- Destroying tax records.
- Filing a false tax return.
- Maintaining a double set of books for your business.
These are just a few examples of how criminal tax evasion can play out. Keep reading for more detailed scenarios about the different forms of tax evasion.
How Do People Evade Tax Assessment?
The most common way that people and businesses evade the assessment of tax is by lying about their taxable income on their tax returns. Here is an example. Imagine that someone buys a building for $2 million, makes $500,000 of capital upgrades, and sells the building for $4 million. They have a capital gain of $1.5 million that they are supposed to report to the Internal Revenue Service on their tax returns.
However, when they file their tax return, they decide to inflate their basis. That’s the price they paid when they bought the building, plus their capital improvements. Instead of reporting the true $2.5 million basis, they report a $3.5 million basis.
As a result, their income tax return shows $500,000 in capital gains. This reduces their tax bill. Note that the tax liability that shows on a tax return is called your assessment. By taking these actions, the taxpayer evaded their tax assessment.
To give you an example of local tax evasion, imagine someone buys a used vehicle from their neighbor for $15,000, but they write that they only paid $1,000 on the sales documents. When they go to register the vehicle, they have to pay state and local sales tax. By law, they should pay sales tax on the entire $15,000 that they paid for the vehicle, but they only pay on the $1,000. This is also an evasion of assessment.
How Do People Evade Tax Payments?
The most common way that people evade paying taxes is by lying about their income/assets to convince the IRS that they can’t afford to pay the tax.
Here is an example. Say that someone owes $150,000 to the IRS, and they apply for an offer in compromise to reduce their tax bill. During the application process, they are supposed to reveal all of their assets and income to the IRS. But they don’t include income from their side business, and they transfer most of their assets to a friend before filling out the application.
The IRS believes the details on their application, and the agency reduces their tax bill. However, the taxpayer’s application had false information. They evaded paying their taxes.
In other cases, people may commit evasion just by not paying – this is called failure to pay. For instance, maybe they move off the grid so the IRS can’t find them.
Is Failure to File a Return Evasion?
Failure to file a return may be considered tax evasion. After all, you are avoiding paying a tax. However, it’s not necessarily a crime in most cases. Typically, if you have unfiled returns, you can catch up without worrying about evasion or any other charges.
However, it’s always best to contact the IRS first. If you wait until the IRS contacts you, you put yourself at risk of additional penalties. By contacting the agency about your unfiled returns, you can qualify to make a voluntary disclosure. This helps to reduce your failure-to-pay and other penalties, and it often ensures that the IRS only looks at a limited number of years.
If you wait and let the IRS find you, that can increase the chances that the agent on your case might look at the situation suspiciously. They might think that you were trying to willfully evade the tax in a criminal way, and if this happens, they will highlight the case for review.
Is Keeping Two Sets of Books Illegal?
Generally, when businesses keep two sets of books, it’s so they can file a false tax return. This is illegal. Typically, the business puts the correct information in one set of books that they use to track how their business is really doing.
Then, they create a second set of books that they use to file their tax return. The second set of books may not show all of their revenue, and it might overstate their expenses.
How Does the IRS Find You If You Commit Evasion?
The IRS finds tax evaders through tax audits, computer programs, and whistleblower programs. The IRS randomly selects several accounts for audit every year. If the auditor finds something that appears suspicious, they will flag the account for review by a manager.
If the manager agrees that it looks like a potential crime, they will escalate the return through the system until it gets to someone who can prosecute the taxpayer.
Computer systems review tax returns and other documents for signs of anomalies. If the computer discovers any discrepancies, it flags the return for manual review. For instance, if you report one amount of realized gains but your investment bank sends a document that shows a higher amount, the IRS may take a closer look at your tax return.
The whistleblower program is an IRS program where the IRS allows people to report taxpayers and businesses for suspected tax crimes. There is even a record program built in where the whistleblower can get a percentage of the unpaid tax.
Is Tax Evasion Legal?
No. Tax evasion is illegal. It carries felony charges. The punishments can be up to $250,000 for an individual and up to $500,000 for a corporation. Prison time can be up to five years.
But you might be thinking everybody commits tax evasion, don’t they? Is it always a criminal tax act? What about mom-and-pop business owners who write off their home utilities as business expenses? What about businesses that inflate their deductions just a little? Or write off personal vacations as business vacations?
What about restaurants that don’t pay payroll taxes on their employee’s tips? Is it tax evasion if a server or bartender doesn’t report their tips as income? What really constitutes criminal tax evasion?
All of these actions are illegal. But the penalties can vary. It’s also relative. The IRS is going to spend more time looking for a corporation that has defrauded the government of millions of dollars than it is a small business owner who writes off their personal cell phones.
But you definitely wouldn’t want to be the person that the IRS chooses to make an example of. If you’re not sure if what you did is tax evasion or fraud? You should contact a tax lawyer to help you. If you definitely know what you did was illegal? Then, you should contact a tax lawyer even sooner.
Consequences of Tax Evasion
If you didn’t purposely set out to deceive the IRS, such as by falsely reporting your income, then it’s unlikely that you will go to jail or prison for tax evasion. You have to have willful intent.
That being said, there are still many consequences you could be hit with if you did, in fact, commit tax evasion.
Here are some of the most common things that can happen to you when the IRS finds out that you haven’t paid what you truly owe in taxes:
- Criminal charges
- Jail or prison
- Loss of your Social Security benefits
- Loss of your personal property (vehicles, houses)
- Damage to your credit
- Loss of your passport
It’s generally better to at least file your tax returns truthfully and then work on figuring out how to pay your taxes later. A tax evasion lawyer can help you to find a program that will square you with the IRS. They can help you leverage the legal methods that are most effective in these cases.
What Are the Penalties for Tax Evasion?
The penalties for tax evasion can be up to $250,000 for individuals and $500,000 for corporations and/or imprisonment for up to five years.
The consequences of tax evasion generally vary depending on the severity of the crime. Failure to pay a small tax liability, for example, will generally have a smaller penalty than not paying a very large tax liability.
How Much Are Individual Tax Evasion Penalties?
If an individual cheats on their taxes or takes illegal actions to avoid paying their taxes, they have committed a crime. The fine can be up to $250,000 and imprisonment for up to five years.
How Much Are Business Tax Evasion Penalties?
Small business tax evasion penalties are typically the same as individual penalties. If you file a Schedule C, you are considered an individual in relation to this part of the tax code. As a result, your maximum penalty will be up to $250,000.
If your business is a corporation, the penalty can be up to $500,000. Felony charges can also lead to jail time. The average jail time for tax evasion is about three to five years.
Statute of Limitations on Tax Evasion
There is no statute of limitations on tax fraud. However, there are other statutes that can into play if you’re trying to figure out — how long does the IRS have to charge someone with evasion?
The IRS can typically only go back three years to audit a return. If you’re worried that you might have done something wrong on a tax return, you can rest assured that usually, the IRS can only go back three years to audit returns. However, if the IRS finds out that you understated your income by 25% or more, the agency can go back six years.
If the agency thinks fraud has happened, it can go back any number of years to look at old returns. If you have unfiled returns, there is also on statute of limitations. The IRs can go back an indefinite amount of time to assess tax from unfiled returns or to look at the situation to figure out if a crime has occurred. Then, it has 10 years to collect on the debt before that statute of limitations expires.
What Is the Difference Between Tax Evasion and Tax Fraud?
Tax evasion is a type of tax fraud. Tax fraud can include other types of tax crimes such as identity theft to file a false return, preparing a false return for a client, or not collecting or paying withholding tax from employees.
The crime of tax evasion specifically refers to avoiding the assessment or payment of a tax. There are many examples of the forms of tax evasion in the above sections. To read more about fraud — check out our guide to tax fraud.
What Is the Difference Between Tax Avoidance and Tax Evasion?
Tax avoidance refers to legal actions to avoid tax assessments. Tax evasion is illegal action to avoid tax assessments or payments.
Usually, avoiding and evading mean the same thing. But with respect to the tax code, tax avoidance and evasion have different meanings. Tax avoidance is perfectly legal — it’s generally why people hire tax accountants and engage in tax planning. It helps to save a lot of money. Tax avoidance allows you to legally reduce what you owe.
Evasion, in contrast, is illegal. As explained above, it can take a lot of different forms and methods. Evasion and tax avoidance sometimes overlap. That is why it’s critical to have a skilled attorney in your corner when you’re dealing with accusations of an attempt to evade.
Tax attorneys understand the Internal Revenue code. They understand how to argue these cases for their clients. The IRS has lawyers on their side — you need one on your team.
Reach Out to a Tax Evasion Lawyer
Your tax trouble may feel overwhelming. But you can get your tax issues under control and should do so before the IRS takes action. Being criminally prosecuted for tax evasion may be unlikely, but it does happen. And when it does, you can face serious consequences.
If you’re worried about unfiled returns, the most important thing to focus on right now is getting your true tax returns prepared and filed as soon as possible. If you think you committed a tax crime, it’s time to dig in and ensure you’re protected. Our tax team will work tirelessly to review your tax case and come up with a plan to get you current and back into good standing with the IRS. Call the W Tax Group for a free tax case consultation. Call 1-877-500-4930.