Paying taxes is never fun.
But hiding assets from the IRS and violating federal tax law to avoid paying what you owe can have serious consequences, including costly court battles, hefty fines and even time in prison.
What is tax evasion?
Tax evasion is the illegal act of deliberately underpaying or not paying your federal taxes. Because tax evasion is a federal offense and felony under current U.S. tax law, individuals and companies found guilty of evading their taxes may be subject to anything from substantial financial penalties to criminal charges, or both.
What is considered tax evasion?
There are two types of tax evasion officially recognized by the IRS:
What are examples of tax evasion?
Some of the actions federal courts have found to meet the definition of tax evasion include:
- Underreporting your income
- Deliberately underpaying your taxes
- Falsifying records of your income
- Destroying records
- Claiming nonexistent or illegitimate deductions (business expenses, dependents, etc.)
For instance, if you claimed $20,000 in deductions last year but were only eligible for $4,000, you’re likely guilty of tax evasion. Similarly, if you were frequently paid in cash during the year and claimed earnings below what you actually made, you underreported your income and may face criminal charges.
Note that tax deficiencies like unpaid taxes or errors on your return is not enough to be guilty of tax evasion. According to federal rules, a taxpayer is only guilty of evasion when there’s an “affirmative” and intentional act to evade tax assessment or payment. In other words, proving the intent to commit an illegal act is key to showing you committed tax evasion.
Who goes to jail for tax evasion?
The chance an individual serves jail time for tax evasion generally depends on the nature and severity of their case, including how much money and assets they were hiding from the federal government. As a felony crime, tax evasion may result in a sentence of 1-3 years in federal prison, a penalty of up to $250,000 or a combination of both.
Depending on the offense, businesses or corporations guilty of violating tax law may face fines of up to $500,000.
Because the tax code is so complex, taxpayers are bound to make mistakes, setting the bar pretty high to prove an error was made beyond simple negligence. This is one reason why the IRS tends to prefer civil penalties over jail time in tax evasion matters. Criminal prosecution for evading your taxes is more likely in cases involving patterns of extensive, willful fraud—those taking over the course of several years.
What is tax avoidance?
Unlike tax evasion, tax avoidance involves the legal means by which an individual or company can reduce their tax burden. Current tax law offers taxpayers a number of ways to lower their full tax liability, including charitable donations, investing money into approved tax-deferred mechanisms and legally claiming deductions to reduce your taxable income.
Some of the more common ways you can engage in legal tax avoidance and reduce your tax bill include:
- Claiming dependents on your tax return
- Investing in an IRA (Individual Retirement Account) or 401k
- Donating assets to charity
- Deducting any investment losses (capital gains)
- Taking advantage of tax credit eligibility
What is the difference between tax evasion and tax avoidance?
The main difference between tax evasion and tax avoidance is legality. While tax evasion involves intentional, illegal acts to hide assets or money from the IRS, tax avoidance is centered on using legally available methods to reduce your taxable income, lower tax payments and minimize your tax bill before the filing deadline.
What is tax fraud?
Tax fraud includes any effort to willfully deceive the IRS by intentionally lying on a tax return to lower your tax liability. While tax evasion fits the definition of tax fraud, it is considered a subset of fraud and is primarily focused on the illegal and intentional avoidance of tax payment.
In other words, evading your taxes is always considered a form of tax fraud, while committing fraud doesn’t always mean you’re guilty of tax evasion.
Solutions to tax evasion and tax avoidance
With any new tax season comes another opportunity to reduce your tax bill and maximize your return. But doing so accurately, thoroughly and legally is key to avoiding run-ins with the IRS, not to mention the potentially severe financial and criminal penalties that can result from hiding your assets and violating federal tax law.
Here are a few tips for avoiding tax evasion and reducing your taxes the right way in 2020:
At Liberty Tax®, we provide the guidance and expertise to reduce your taxes and maximize your return—and ensure you’re ready for the April 15 deadline.
Call or visit your local Liberty Tax® pro today to learn more.