Tax evasion includes any act that is designed to defraud the Internal Revenue Service (IRS). The definition of tax evasion is very broad and permits the IRS to come after an individual for almost any misstatements made knowingly on their taxes.
Tax evasion often involves an individual or corporation that misrepresents their income to the IRS. A misrepresentation may include acts such as:
- Underreporting yearly income;
- Inflating deductions;
- Hiding taxable income; or
- Transferring income to offshore accounts.
What are Some Examples of Tax Evasion?
Tax evasion typically involves intentional wrongdoing. Mere negligence or carelessness which causes a tax error is not tax evasion. The IRS typically investigates to determine whether or not tax evasion was committed. Examples of tax fraud include:
- Intentional understatements of income;
- Providing inadequate records;
- Failure to file tax returns;
- Inconsistent explanations of tax records;
- Failure to cooperate with tax authorities;
- Engaging in illegal tax activities and fraud;
- Dealing in cash to avoid being taxed;
- Failure to make required tax payments; and
- Concealment of taxable assets.
Other possible conduct that is considered tax evasion includes lying, concealing, or delaying tactics that are designed to mislead IRS agents during their investigation after an individual or business has been red flagged.
What are the Punishments for Tax Evasion?
The punishments for tax evasion are criminal punishments. In the United States, tax evasion is a crime. Because of this, an individual may be subject to substantial monetary penalties, imprisonment, or both. Punishment for tax evasion may be harsh and can include:
- Fines up to $250,000 for individuals and up to $500,000 for corporations;
- A 75% civil penalty; and
- Criminal charges, which may include imprisonment for up to 3 years.
What is Employment Tax Evasion?
In the United States, federal laws require an employer to withhold federal income tax and Social Security and Medicare taxes from their employees’ paychecks and to send that money to the IRS. Federal and state laws also require businesses to pay additional unemployment tax.
If an employer fails to pay these taxes to the IRS, they are engaging in tax evasion. Employment tax evasion schemes can occur in several forms, including:
- Pyramiding, or pyramiding of employment taxes is a fraudulent conduct where a business withholds taxes from its employees and fails to report them to the IRS as taxable income;
- Employment leasing is a practice of contracting with an outside business to handle all business administration and payroll of employees and the leasing company fails to pay over to the IRS any portion of collected employment taxes;
- Paying employees in cash is a common way to evade income and employment taxes resulting in lost tax revenue to the government and loss of benefits to employees; and
- False payroll tax returns, where an employer prepares false reports of payroll to minimize their tax bill.
How Does an Employee Know Whether or Not an Employer Is Evading Taxes?
There are several ways in which an employee may be able to determine whether or not their employer is paying taxes withheld from paychecks. One way is that paycheck stubs should have lines that report which taxes have been withheld. In addition, W-2 and tax statements should report which taxes have been withheld.
If an employer is not withholding taxes from the employee’s paycheck, the employee is ultimately responsible for paying those taxes. The IRS urges employees to keep a watch on their pay stubs and report any payroll tax evasion and fraudulent conduct committed by their employer.
What Happens if an Employer is Convicted of Employment Tax Evasion?
If an employer fails to pay taxes or to properly report taxes, they may face criminal and civil sanctions, which may include fines and prison time. Evading employment taxes can cause serious consequences for employers and employees. Employees may suffer down the road because they may not qualify for social security, unemployment benefits, or medicare if their employer has failed to pay the required employment and unemployment taxes.
Can an Employee be Held Liable for Employment Tax Evasion?
If an individual’s employer fails to pay employment taxes and the IRS cannot collect those taxes from the employer, the employee is ultimately responsible for their share of the federal income tax as well as Medicare and Social Security taxes.
If an employer has failed to pay these taxes, as noted above, the employee may not be able to claim Social Security, Medicare or unemployment benefits in the future.
What if I Am Self-Employed?
Individuals who are self-employed are still required to pay federal income tax, Social Security and Medicare taxes. Self-employed individuals who engage in employment tax evasion are subject to civil and criminal penalties.
If an individual is self-employed, they must make sure to report all of their business expenses and all of the income they have received from their business that is taxable. Proper and Accurate record keeping will assist self-employed individuals with avoiding tax evasion and tax fraud.
What is the Difference between Negligence and Fraud Tax Evasion?
Negligent tax mistakes occur when an individual commits a careless error without the specific intent to actually defraud the IRS. The individual typically is not aware of the mistake until they are notified. A negligent tax mistake does not invoke a criminal offense. However, the individual could face civil penalties.
Tax fraud occurs when an individual intentionally commits an act in order to the IRS. An individual who commits tax fraud is aware that they are attempting to defraud the IRS and they commit an act on purpose while being aware of the consequences if they were to be investigated and caught.
What are Possible Defenses if I am Accused of Tax Evasion?
Tax evasion is considered a crime, so any defense available for other crimes may be used. Common defenses may include:
- There is insufficient evidence to show the individual willfully intended to not pay their taxes;
- The statute of limitations has passed, which is usually 6 years;
- Entrapment, or when the government compels an innocent individual to commit a crime they would not normally commit;
- A mistake regarding what day taxes are due or what items are required to be reported.
- Claiming that individual did not know they were required to file taxes is not a defense;
- Insanity, although it is difficult to prove; and
- The government is unable to prove intentional conduct. They must prove that the taxpayer
- intended to evade their taxes and knew of the possible consequences of their actions.
How Likely is it that Any of These Defenses will Work?
Tax evasion defenses may be used when insufficient evidence exists of intentional or purposeful conduct. The IRS is required to prove that the individual knew of their wrongdoing and intentionally misreported their taxes or tried to evade paying taxes. As previously noted, mere mistakes and carelessness are not enough to convict an individual of tax evasion.
Another possible defense to tax evasion may be that the individual honestly believed they were not evading or hiding taxable income because of a misunderstanding of the law. In order to use this defense, the individual must show proof of reliance on information such as from an accountant or a lawyer.
Do I Need a Lawyer if I Am Accused of Tax Evasion?
It is essential to have the assistance of an experienced tax lawyer if you are accused of tax evasion. It is important to contact the attorney as soon as possible. Your attorney can review your case, advise you of your rights and any possible defenses, and assist you in navigating the complicated legal system as well as assist you with any interactions with the IRS.