Tax evasion, a subset of tax fraud, usually involves a willful misrepresentation of taxable income. Tax evasion is also referred to as criminal tax fraud or, criminal tax evasion. Evaders can face criminal penalties such as prison time and/or significant fines.
Significantly, Internal Revenue Code (IRC) §7201 states that:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
In other words, tax evasion under IRC §7201 creates two offenses: (1) the willful attempt to evade or defeat the assessment of a tax, and (2) the willful attempt to evade or defeat the payment of a tax.1
1. Evasion of Assessment is the most common form of tax evasion. This occurs when there is a willful attempt to evade or defeat the assessment of a tax through filing a false return that omits income, credit, or deductions to which the taxpayer was not entitled. This can also occur when the tax reported on a deduction is falsely and purposefully understated. Consequently, willful under reporting is an attempt to evade or defeat the assessment of tax.2
2. Evasion of Payment occurs when (1) there is an attempt to evade or defeat a payment (2) of an established owed tax, and (3) there was an affirmative or willful3 act of concealment of money or assets from which the tax could have been paid.4
Examples of tax evasion include, but are not limited to:
– Intentionally concealing assets to hinder the IRS’s ability to determine how much tax is owed;
– Under reporting income;
– Claiming fake business expenses;
– Claiming illegitimate dependents; and
– Not filing returns
It is also important to understand that the broad scope of the language of IRC §7201 means that anyone helping the taxpayer evade taxes, such as an accountant or bookkeeper, may be prosecuted, as well.
It’s always best to consult with a tax professional to discuss any concerns or questions about whether something is permissible avoidance or illegal evasion.
Sources:
- See also, United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992).
- IRC §7201.
- See, Sansone v. United States, 380 U.S. 343, 351 (1965) (defining a willful attempt to evade federal income taxes in violation of IRC §7201).
- IRC §7201; See, United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992).