Federal Tax Evasion – 26 U.S.C. § 7201

Federal Tax Evasion – 26 U.S.C. § 7201

Tax evasion is no joke, folks. The IRS and federal prosecutors take this stuff pretty seriously–and for good reason. After all, taxes are what keep our government programs running. So when people try to get out of paying their fair share, it hurts everyone.

Now, I’m not here to lecture you. But I do think it’s important to understand what tax evasion is, why people do it, and what the consequences can be. There’s a lot of misinformation out there. My goal is to break it down in simple terms so you know the facts.

What is Tax Evasion?

Tax evasion refers to illegally avoiding paying taxes that are owed, typically by underreporting income, overstating deductions, failing to file returns, and hiding or transferring assets.[1] It’s a purposeful attempt to defraud the government by not paying taxes that you know you rightfully owe.

There are a few key elements that make up tax evasion:

• It has to be willful – meaning you know that you owe more tax but are intentionally trying to avoid paying it.
• There must be additional tax owed – simply making a mistake doesn’t count as evasion.
• There must be some affirmative act of evasion – merely failing to pay taxes owed isn’t enough, you have to take active steps to illegally reduce your tax liability.

Some examples of tax evasion include:

• Failing to report income from a side business or gig work
• Claiming false deductions or business expenses
• Using a shell company to hide assets or income
• Keeping two sets of books to underreport earnings
• Using cash extensively to avoid creating a paper trail

How Common is Tax Evasion?

The IRS estimates that about $458 billion in taxes goes unpaid each year due to tax evasion.[2] That’s a crazy amount of money that could be going to fund public schools, healthcare, infrastructure, and other important government services.

While the vast majority of Americans pay their taxes honestly and accurately, there are always some who try to game the system. In most cases, it involves relatively small amounts of unpaid taxes related to underreported income or exaggerated deductions. But there are also high profile cases involving millions of dollars in offshore accounts and other sophisticated schemes.

Why Do People Evade Taxes?

There are many reasons why people evade taxes, including:

• Greed – to keep more of their income
• Financial difficulties – inability to pay back taxes owed
• Disagreement with government policies – objection to how tax dollars are spent
• Perceived unfairness – belief that the tax system favors the wealthy
• Thrill seeking – desire to outsmart the IRS

Of course, these reasons don’t justify cheating on your taxes. But understanding motives can help shape more effective policies to improve tax compliance.

How is Tax Evasion Detected?

The IRS uses advanced analytics to look for anomalies and patterns that may indicate potential tax evasion. Some red flags include:[3]

• Large, unusual deductions or business losses
• Significant discrepancies between income reported across different forms
• Lavish spending that doesn’t match reported income
• Moving money between personal and business accounts
• Overseas activity and offshore accounts

The IRS also relies on whistleblowers, confidential informants, and even browsing social media to identify warning signs. And they collaborate with other federal agencies like the FBI for criminal investigations.

What are the Consequences of Tax Evasion?

Getting caught evading taxes can lead to serious criminal penalties including:

• Up to 5 years in prison
• Fines up to $250,000 for individuals or $500,000 for corporations
• Court ordered restitution for back taxes owed
• Seizure of assets obtained through evasion

Defendants often have to pay court costs, interest on unpaid taxes, accountant fees and other expenses related to the investigation and prosecution.[4]

The government also pursues civil fines and penalties through the IRS. Common penalties include:

• Accuracy penalties of 20% of underpaid tax
• Delinquency penalties of 5% per month of late payment
• Failure to file penalties of 5% per month up to 25%

These civil fines are imposed in addition to having to repay the back taxes plus interest. The total financial consequences can be staggering.

What are the Legal Defenses?

For those charged with criminal tax evasion, possible defenses include:[5]

• Lack of willfulness – arguing deficiencies were accidental, not intentional
• No additional tax owed – proving the IRS made errors in determining unpaid tax
• No affirmative act of evasion – showing that you did not take steps to illegally avoid tax
• Reliance on a tax professional – demonstrating good faith by following an accountant’s advice

Other strategies include procedural challenges, like disputing the admissibility of evidence, or constitutional violations related to how evidence was obtained.

Takeaways on Tax Evasion

The bottom line is that tax evasion is a very serious matter with potentially life-changing consequences. If you’re ever tempted to fudge a few numbers on your return, resist that urge! And if you’ve made honest mistakes, work with the IRS to fix them. They offer programs like voluntary disclosure to avoid criminal prosecution.

At the end of the day, paying taxes is the right thing to do. It supports important public programs and services we all rely on. So be sure to pay your fair share – because tax evasion just isn’t worth the risk.

References

[1] 26 U.S. Code § 7201

[2] IRS Tax Gap Estimates

[3] IRS Abusive Tax Shelters and Transactions

[4] DOJ Tax Division

[5] Attempting to Evade or Defeat a Tax – Brown PC