Tax Evasion Laws

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 What is Tax Evasion?

Tax evasion occurs when an individual commits an act designed to defraud the Internal Revenue Service (IRS). The definition of tax evasion is very broad. It allows the IRS to go after an individual for almost any knowing misstatements on their taxes.

Tax evasion typically involves an individual or corporation that misrepresents their income to the IRS. misrepresentations may involve actions such as:

  • Underreporting yearly income;
  • Inflating deductions;
  • Hiding taxable money; or
  • Transferring funds to offshore accounts.

What are Some Examples of Tax Evasion? 

There are numerous tax evasion examples. These include:

  • Personal income tax evasion, which occurs when an individual falsifies income or other factual data;
  • Business tax evasion, which occurs in connection with a business and may include:
    • claiming false deductions;
    • deliberately underreporting or omitting income;
    • overstating the amount of deductions;
    • keeping more than one set of books, or making false statements in books and records;
    • claiming personal expenses as business expenses; or
    • hiding or transferring assets or income;
  • Employment tax evasion, which occurs in an employment setting and may include:
    • failure to pay employment taxes;
    • falsifying payroll;
    • pyramiding; 
    • employment leasing; or
    • paying employees in cash.

When Must the IRS Charge You with Tax Evasion?

The IRS has 6 years to pursue an individual for any misstatements on their taxes. However, there is no time limit on when the IRS can audit an individual.

In tax evasion cases, the IRS must prove:

  • An unpaid tax liability exists;
  • The defendant committed some kind of act to attempt to hide their taxable income and dodge paying taxes on their money;
  • The defendant had specific intent to dodge paying taxes that they had a legal duty to pay; and
  • The jury must find the defendant, or the accused individual, guilty of each element beyond a reasonable doubt.

What are The Criminal Penalties For Tax Evasion?

In the United States, tax evasion is a crime. It is punishable by imprisonment, substantial monetary penalties, or both. The punishment for tax evasion may be harsh and can include:

  • Fines as high as $250,000 for individuals and $500,000 for corporations;
  • A 75% civil penalty;
  • Criminal charges, including imprisonment of up to 5 years; and
  • Attorney’s fees and court costs.

What is Tax Fraud?

Tax fraud occurs when an individual or business willfully and intentionally falsifies information on their tax return in order to avoid paying their entire tax obligation. Because the tax system in the United States is based on voluntary compliance or the self-assessment of taxes owed, the IRS attempts to discourage violations by publicizing convictions for tax fraud, seeking prison terms for offenders as well as by assessing fines, civil taxes, and penalties. 

What are Some Examples of Tax Fraud?

Tax fraud includes willful and intentional violations of the tax code. Examples may include:

  • Claiming a false deduction;
  • Claiming a personal expense as business expense;
  • Not reporting earned income;
  • Intentionally failing to file an income tax return;
  • Willfully failing to pay taxes due;
  • Intentionally failing to report all income received; and
  • Preparing and filing a false tax return.

What is the Difference Between Negligence and Income Tax Fraud?

There is a difference between negligence and income tax fraud. The tax code is a very complex set of rules and regulations which are difficult for most individuals to comprehend.

In the event that an individual commits a careless error, the IRS typically assumes that it was an honest mistake rather than a willful evasion of the tax code, so long as there are not other signs of fraud. In these cases, the tax auditor may consider the mistake to be negligence. However, even for unintentional violations, the IRS may assess the taxpayer with a fine of 20% of the underpayment.

In order to distinguish between negligence and willful violations, a tax auditor looks for certain types of suspicious and fraudulent activity, including:

  • The use of a false Social Security number;
  • Falsifying documents;
  • Concealing or transferring income;
  • Claiming too many deductions and exemptions; and
  • Willfully underreporting income.

What are the Penalties for Income Tax Fraud?

Then penalties for income tax fraud may be severe. A taxpayer who willfully attempts to avoid paying their income taxes is subject to criminal and civil penalties. The type of fraud will determine the type of penalty assessed. Two examples of tax fraud will be discussed below.

If a taxpayer is convicted of evading or defeating paying taxes, they are guilty of a felony. They are subject to other penalties applicable under law in addition to the following penalties:

  • Imprisonment for no more than 5 years;
  • A fine or not more than $250,000 for individuals or $500,000 for corporations; or
  • Both penalties along with the cost of prosecution.

If a taxpayer is convicted of fraud and false statements, they are guilty of a felony. The taxpayer is subject to the following penalties:

  • Imprisonment for no more than 3 years;
  • A fine of not more than $250,000 for individuals or $500,000 for corporations; or
  • Both penalties along with the cost of prosecution.

What is the Difference between Negligence and Tax Evasion?  

A negligent tax error occurs when an individual commits a careless mistake without the specific intent to actually defraud the IRS. The individual typically is not aware that they made a mistake until they are notified about the mistake. 

A negligent tax error is not considered a criminal offense. However, the taxpayer could face civil penalties.

On the other hand, a taxpayer commits tax fraud when they intentionally commit an act with the intent of defrauding the IRS. An individual who commits tax fraud is aware that they are attempting to defraud the IRS. These individuals purposely commit acts while knowing the consequences they may face if they are investigated and convicted.

What are Possible Defenses If I Am Accused of Tax Evasion?

Since tax evasion is a crime, there are several defenses that are available. Some are similar to defenses to other types of crime. These include:

  • Insufficient evidence;
  • Statute of limitations;
  • Entrapment;
  • Mistake;
  • Insanity; and
  • Intentional conduct.

In order to convict an individual of tax evasion, the prosecution must show that they willfully intended not to pay their taxes. For example, an individual may be able to argue they failed to file their return because they forgot, which may be enough to dismiss the case.

A statute of limitations is a time limit in which a claim can be filed. There is a statute of limitation on tax evasion charges. After this time period has passed, the IRS cannot file a tax evasion suit even if sufficient evidence is available. The statute of limitations on tax evasion is 6 years.

Entrapment occurs when the government compels an innocent individual to commit a crime they otherwise would not have. It is important to note, however, that simply providing an individual the opportunity to commit a crime is not considered entrapment. 

The defense of mistake can be used if an individual was mistaken regarding what day taxes are due or what they are required to report. Simply claiming an individual was not aware they needed to file taxes is not a mistake defense. 

Insanity may be a possible defense, but it is difficult to prove. This defense permits the individual to claim they were insane at the time or the offense or during their trial. The success rate of this defense is low in criminal cases and would likely be ineffective in a tax evasion case.

It is important to note that the government is required to prove that the taxpayer intended to evade the IRS and not pay their taxes and they knew of the possible consequences of their wrongdoing. This is a high burden and if the government cannot show intent, they cannot prevail on their claim.

Do I Need a Tax Evasion Attorney? 

Yes, it is essential to have the assistance of an experienced tax lawyer. As discussed above, the penalties for tax evasion may be severe. Additionally, the government will have attorneys and prosecutors on staff for these types of cases, so it is important to have representation of your own. 

A tax evasion lawyer will review your case, advise you of your rights, and represent you during any court proceedings. Having an attorney on your side can keep your honest tax mistake from turning into a life-altering problem.

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