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

Given the complexity of the US tax system, it is natural to get stressed out if you think you made a mistake when filing your taxes or if you know you did. But what will the Revenue Agency do? You are probably asking yourself a lot of questions right now, such as:

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

First, take a deep breath. You’re not going to jail, probably. Tax evasion is a crime and imprisonment is a potential penalty. But it is a very specific crime that requires more than just a mistake. So, before you panic, find out what tax evasion is, how it differs from similar infractions, and how to avoid it.

What is tax evasion?

Tax evasion is an intentional attempt to evade the assessment or payment of taxes. It can come in a variety of forms, including intentionally omitting certain income from your tax return, requesting deductions you know you are ineligible for, or failing to pay taxes due to the IRS.

It is important to note that failure to report or pay taxes does not always mean that you have committed tax evasion. While both can result in fines and interest, they are generally not considered to be criminal offenses in the same way as tax evasion. For either of them to be considered tax evasion, it must be intentional.

Indeed, a good faith belief that you are not violating tax law is a legitimate defense in a tax proceeding, even if it is not a guarantee that you will not be convicted if no one believes you.

How tax evasion works

There are two main types of tax evasion.

  • Intentional attempt to evade the tax assessment. The most common type of tax evasion occurs when you do not report income or claim deductions for which you know you are not eligible. Basically, you are hiding the amount you owe from the IRS.
  • Intentional attempt to evade payment of taxes. This happens when you don’t pay taxes that the IRS has already determined you owe or hide money and assets that you could use to pay for it.

The IRS treats both of them equally. Both are intentional failures to pay the amount of taxes due and both can lead to criminal penalties.

Penalties for tax evasion

The federal government takes tax evasion seriously, and intentional attempts to avoid filing accurate tax returns or paying taxes can result in severe penalties.

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

Examples of tax evasion

When we think of tax evasion, we often think of wealthy individuals who don’t pay taxes or scammers who escape government taxes. And it is true that there are many notorious examples of this. But you might be surprised to learn that there are many ways the average person can commit tax evasion.

One of the most common forms of tax evasion is the failure to submit a tax return on the tax return. For example, maybe you have a side hustle that earns you a little extra money.

Legally, you have to pay taxes on that income just like any other income. Intentionally leaving it out of the tax return to avoid taxation is an example of tax evasion.

Tax evasion can also occur if you try to reduce your tax liability by claiming deductions for which you are not entitled. Let’s say you’ve paid childcare bills for your baby. If so, you may be eligible for child and dependent care credit. But if you’ve claimed the credit without paying childcare costs 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 that you have illegally earned. If you have made money through illegal activities or acquired property illegally, not reporting this 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 cover-up (ask Al Capone).

Tax evasion vs tax avoidance

Tax avoidance is another way to reduce the tax burden, but in a very different way from tax evasion. Tax avoidance, unlike tax evasion, is a perfectly legal way to avoid taxation.

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

As long as you are legally eligible for the deductions and credits you claim – and you can provide proof that you are eligible – you can use tax avoidance to pay less tax.

Frequently asked questions about tax evasion

Still have questions about tax evasion? The answers to these frequently asked questions can help you if you are concerned 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 offense is to fully and accurately report your tax and tax status to the IRS to the best of your ability. Tax evasion is a serious crime that can result in fines and prison sentences, but generally only applies when the evasion was intentional.

What can i do if i have been accused of tax fraud?

If you have been accused of tax fraud, the first thing to do is to enlist the help of qualified professionals. Tax evasion is a federal crime and is likely to come with a thorough investigation that you shouldn’t attempt to navigate on your own. Both a tax attorney and an accountant can be helpful during this process.

What is the difference between tax evasion and tax protection?

Tax protection consists of strategically placing certain income and assets to reduce or avoid taxation. In some cases, the tax shield is a form of tax evasion, especially if you are protecting money to avoid using it to pay legally owed taxes.

However, not all tax coverage is illegal. In some cases, tax hedges are legal tools that can help you reduce your tax liability. An example of a tax shield you may be familiar with is a 401 (k), which allows you to avoid paying tax on a portion of your income by using a pre-tax contribution.

What kind of crime is tax evasion?

Tax evasion is a federal crime, which means that the federal government enforces it. Since tax evasion is a criminal rather than a civil offense, it can result in fines and prison sentences.

What happens if you report someone for tax evasion?

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

Final word

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

That said, it’s best to take all steps possible to make sure you report accurately and pay your taxes on time. If you don’t feel comfortable submitting your application, ask for help from tax software or an accountant.

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