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Tax Evasion – What It Is (Meaning), Penalties, and Examples

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Given the complexity of the U.S. tax system, it’s natural to get stressed if you think you made a mistake when filing your taxes — or know you did. But what’s the IRS going to do about it? You’re probably asking yourself a lot of questions right about now, such as:  

  • Have I committed tax evasion? 
  • Will they let me fix it?
  • Will there be a fine or penalty? 
  • Will they put me in prison?

First, take a deep breath. You’re not going to prison — probably. Tax evasion is a crime, and prison is a potential penalty. But it’s a very specific crime requiring more than just getting something wrong. So before you panic, learn what tax evasion is, how it differs from similar infractions, and how to avoid it. 

What Is Tax Evasion?

Tax evasion is a willful attempt to evade the assessment or payment of taxes. It can come in several forms, including intentionally omitting certain income on your tax return, claiming deductions you know you aren’t eligible for, or failing to pay taxes you owe to the IRS.

It’s important to note that the failure to report or pay your taxes properly doesn’t always mean you’ve committed tax evasion. While both can result in financial penalties and interest, they generally aren’t considered criminal offenses in the same way tax evasion is. For either to be considered tax evasion, it must be willful. 

In fact, a good-faith belief that you aren’t violating tax law is a legitimate defense in a tax prosecution, though it’s no guarantee you won’t be convicted if no one believes you.

How Tax Evasion Works

There are two main types of tax evasion. 

  • Willful Attempt to Evade the Assessment of Tax. The most common type of tax evasion happens when you fail to report income or claim deductions you know you aren’t eligible for. Essentially, you’re hiding the amount you owe from the IRS.
  • Willful Attempt to Evade the Payment of Tax. This happens when you fail to pay taxes the IRS has already established you owe or conceal money and assets you could use to pay it.

The IRS treats both the same. Both are intentional failures to pay the amount of taxes you owe, and both can result in criminal penalties.

Penalties for Tax Evasion

The federal government takes tax evasion seriously, and intentional attempts to avoid filing accurate tax returns or paying your taxes can come with stiff penalties. 

Under federal law, tax evasion is a felony offense. Any individuals found guilty can face fines of up to $250,000 and up to five years in prison. Corporations can receive fines of up to $500,000. 

Examples of Tax Evasion

When we think of tax evasion, we often think of wealthy individuals failing to pay their taxes or con artists escaping taxation from the government. And it’s true that there are plenty of infamous examples of that. But you might be surprised to learn that there are plenty of ways for the average person to commit tax evasion.

One of the most common forms of tax evasion involves failing to report income on your tax return. For example, maybe you have a side hustle that earns you a bit of extra money. 

Legally, you must pay taxes on that income just like any other income. Intentionally leaving it off your tax returns to avoid taxation is an example of tax evasion.

Tax evasion can also occur if you attempt to reduce your tax liability by claiming deductions you aren’t eligible for. Let’s say you paid child care expenses for your toddler. In that case, you might qualify for the child and dependent care credit. But if you claimed the credit without having paid child care expenses in an attempt to illegally reduce your tax burden, you could be guilty of tax evasion.

And as strange as it may sound, the IRS also expects you to report income you’ve earned illegally. If you’ve made money through illegal activity or have illegally acquired property, failing to report it on your tax return to avoid taxation could be an example of tax evasion. As they say. It’s not the crime, it’s the coverup (ask Al Capone).

Tax Evasion vs. Tax Avoidance

Tax avoidance is another way of reducing your tax burden but in a very different way from tax evasion. Tax avoidance, unlike tax evasion, is a perfectly legal way of avoiding taxation.

The federal government has plenty of tools taxpayers can use to pay less in taxes. Those tools include tax deductions, credits, and adjustments, which can help you either reduce your taxable income or directly reduce the amount of taxes you owe.

As long as you legally qualify for the deductions and credits you claim — and can provide proof you qualify — you can use tax avoidance to pay less in taxes.

Tax Evasion FAQs

Do you still have questions about tax evasion? The answers to these frequently asked questions can help you if you’re worried about being charged with this federal crime.

How Can I Avoid Committing Tax Fraud?

The best way to avoid committing tax fraud or any other tax crime is to fully and accurately report your income and tax situation to the IRS to the best of your ability. Tax evasion is a serious crime that can result in fines and jail time, but it generally only applies when the evasion was intentional. 

What Can I Do if I’ve Been Charged With Tax Fraud?

If you’ve been charged with tax fraud, the first thing you should do is enlist the help of skilled professionals. Tax evasion is a federal crime and is likely to be accompanied by a thorough investigation you shouldn’t attempt to navigate alone. Both a tax attorney and an accountant can be helpful during this process.

What’s the Difference Between Tax Evasion & Tax Sheltering?

Tax sheltering is strategically placing certain income and assets to reduce or avoid taxation. In some cases, tax sheltering is a form of tax evasion, especially if you’re sheltering money to avoid using it to pay taxes you legally owe.

However, not all tax sheltering is illegal. In some cases, tax shelters are legal tools that can help you reduce your tax liability. An example of a tax shelter you might be familiar with is a 401(k), which allows you to avoid paying taxes on a portion of your income using a pretax contribution.

What Type of Crime Is Tax Evasion?

Tax evasion is a federal crime, meaning the federal government enforces it. Because tax evasion is a criminal offense rather than a civil one, it can result in both fines and prison time.

What Happens if You Report Someone for Tax Evasion?

The IRS allows anyone to file a report for tax violations if they suspect someone they know isn’t complying with federal tax laws. You can only report tax fraud using Form 3949-A, Information Referral. Once that happens, the IRS Criminal Investigation Division may investigate to determine if a federal crime occurred.

Final Word

Tax evasion is a serious crime that can result in extraordinary fines and prison time. The good news is just because you forgot to report something or underpaid throughout the year doesn’t mean you’re guilty of tax evasion. You only need to worry about tax evasion if you’ve intentionally failed to report or pay taxes. If you made a mistake, just file a correction. 

That being said, it’s best to take all the steps you can to ensure you accurately report and pay your taxes on time. If you don’t feel comfortable filing yourself, enlist the help of tax software or an accountant.

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