Tax Evasion FAQ: Your Top Questions Answered

Tax Evasion FAQ: Your Top Questions Answered

Paying taxes is no one’s favorite thing, but unfortunately, it’s part of being a law-abiding citizen. However, some people try to get out of paying what they owe through tax evasion. This article will cover all your most common questions about tax evasion so you can understand what it is, what the penalties are, and how people try to get away with it.

What is Tax Evasion?

The IRS defines tax evasion as “the failure to pay or the deliberate underpayment of federal income taxes.”¹ Basically, it means illegally avoiding paying the taxes you owe. This is different from tax avoidance, which means organizing your finances to legally minimize how much tax you pay.

Some common ways people engage in tax evasion include:

• Underreporting income on their tax returns
• Exaggerating or making up deductions and credits
• Hiding money in offshore bank accounts to conceal income
• Participating in fraudulent tax shelters or schemes

If you make an honest mistake on your taxes, that’s not tax evasion. But intentionally deceiving the IRS about your income or deductions is illegal. The government loses around $345 billion per year from people evading what they owe in taxes.²

What are the Penalties for Tax Evasion?

Tax evasion is a serious crime that can result in either civil or criminal penalties, depending on the specifics of your case. Some potential consequences include:

• Fines – You may have to pay heavy fines equal to up to 75% of the taxes you evaded.
• Jail time – Tax evasion can result in up to 5 years in prison.
• Probation – Courts may sentence you to probation and require you to pay back taxes plus interest and penalties.
• Asset forfeiture – The government can seize assets equal in value to the taxes you evaded.

The more money you owe and the more intentional your deception, the harsher your penalties may be. People who engage in repeated or large-scale tax evasion face up to 10 years in prison.³

What’s the Difference Between Tax Evasion and Tax Fraud?

While people often use the terms “tax evasion” and “tax fraud” interchangeably, they have some important legal differences. According to FindLaw, tax evasion always refers to an illegal, intentional act to avoid paying taxes you owe. But tax fraud can refer to unintentional mistakes as well as deliberate cheating.

There are two types of tax fraud:

• Civil tax fraud – Making false statements on your tax return, whether intentionally or by mistake. The penalties are financial.
• Criminal tax fraud – Willfully attempting to evade taxes through deceit. This can mean jail time.⁴

So all tax evasion counts as criminal tax fraud. But some types of civil tax fraud may be unintentional errors rather than efforts to illegally avoid taxes.

What are Some Common Tax Evasion Schemes?

People engage in all kinds of shady behavior to try to lower their tax bill. Some schemes aimed specifically at evading taxes include:

• Hiding income – Not reporting cash earnings or income from illegal sources.
• Padding deductions – Exaggerating business expenses or charitable donations.
• Fake corporations – Setting up sham companies to claim bogus expenses and deductions.
• Offshore accounts – Stashing money out of the country to hide it from the IRS.

Many people also get involved in organized tax evasion schemes peddled by shady accountants or lawyers. But participating in these scams can get you in even more legal trouble.

What are Some Legal Defenses Against Tax Evasion Charges?

If you’re accused of tax evasion, a skilled tax attorney can help protect your rights and build a strong defense. Some arguments they may use include:

• You made an innocent mistake rather than intentionally deceiving.
• You had a good faith belief you were following the tax code properly.
• You relied on bad professional advice from an accountant or tax preparer.
• The IRS made mistakes in calculating what you owe.

An attorney can also negotiate with prosecutors for reduced charges or punishments. But your best bet is to be fully honest on your taxes from the start. If you have questions or confusion, consult a tax professional to avoid running afoul of the IRS.

1. https://www.law.cornell.edu/wex/tax_evasion ↩

2. https://www.law.cornell.edu/wex/tax_evasion ↩

3. https://www.findlaw.com/tax/tax-problems-audits/tax-evasion-and-fraud.html ↩

4. https://www.findlaw.com/tax/tax-problems-audits/tax-evasion-and-fraud.html ↩