Tax Evasion

What is Tax Evasion?

Tax evasion is the willful attempt to evade or defeat a federal tax or the payment of that tax through illegal conduct.

Tax evasion can involve: 

• Intentionally concealing income, 

• Understating taxable income, 

• Claiming false deductions, 

• Hiding assets, or 

• Giving misleading information to the IRS.

Under IRC §7201 - Attempt to Evade or Defeat Tax, a person who willfully attempts to evade or defeat a federal tax, or its payment, may commit felony tax evasion. 

An incorrect return or understatement of income, however, does not by itself establish tax evasion because intent and conduct are critical to the determination.

How Does Tax Evasion Work?

Federal tax evasion generally requires more than simply owing tax. Under IRC §7201, the offense centers on a willful attempt to evade or defeat tax or its payment.

In applying this rule, the IRS considers whether there was an affirmative act intended to conceal, mislead, or make the taxpayer's true tax position appear different from what it actually was. 

The IRS Internal Revenue Manual guidance on fraud development distinguishes affirmative acts of evasion from simply failing to meet a tax obligation.

What Does Willful Tax Evasion Mean?

For purposes of federal criminal tax law, willfulness generally means the voluntary and intentional violation of a known legal duty.

The IRS guidance on IRC §7201 and willfulness explains that intent may be inferred from the surrounding facts and conduct. Merely understating income or filing an incorrect return does not, standing alone, establish a willful attempt to evade tax.

Evasion of Assessment vs. Evasion of Payment

Federal tax evasion can generally involve either the assessment of tax or the payment of tax.

The IRS guidance on evasion of payment explains that this type of conduct may involve affirmative acts intended to conceal assets or prevent the IRS from collecting an existing liability.

Simply owing tax or failing to pay it does not by itself establish felony tax evasion.

What are Examples of Tax Evasion?

Tax evasion can involve intentional conduct that hides or misrepresents facts used to determine or collect a tax liability.

Examples of tax evasion may include:

• Intentionally omitting taxable income;

• Deliberately understating income received;

• Knowingly claiming fictitious deductions;

• Concealing income or assets;

• Maintaining false books or financial records;

• Making false statements intended to mislead tax authorities; or

• Concealing or transferring assets as part of an attempt to evade payment of tax.

The IRS Internal Revenue Manual on indicators of fraud identifies conduct involving understated income, improper deductions, accounting irregularities, false statements, and concealment among circumstances that may be relevant when evaluating potential fraud.

The existence of one such indicator does not automatically establish criminal tax evasion.

Tax Evasion vs. Tax Avoidance

The main difference between tax evasion and tax avoidance is legality.

The IRS guidance distinguishing tax avoidance from tax evasion explains that taxpayers may legally reduce their tax liability through lawful means. (Source)

Evasion differs because it involves conduct intended to conceal, deceive, or misrepresent relevant facts.

Is Legal Tax Planning Tax Evasion?

No. Legitimate tax planning is not tax evasion.

Taxpayers may use deductions, credits, exclusions, elections, entity structures, and other provisions permitted by tax law to reduce their tax liability.

The important distinction is that lawful tax planning operates within the tax rules and accurately reports the relevant facts. Tax evasion relies on intentional unlawful conduct designed to evade tax.

Is a Tax Mistake, Underpayment, or Negligence Tax Evasion?

A tax mistake, unpaid balance, or negligent error does not automatically become criminal tax evasion.

The IRS distinguishes negligence from willful conduct. Its accuracy-related penalty guidance explains that penalties may apply when an underpayment results from negligence, disregard of tax rules, or certain substantial understatements.

Criminal tax evasion requires a different showing. The issue is not simply whether the return was wrong or tax remained unpaid, but whether the required willful and affirmative conduct was present.

Tax Fraud vs. Tax Evasion - What Is the Difference?

Tax fraud is a broader concept involving intentional wrongdoing connected with tax, while tax evasion under IRC §7201 is a specific federal criminal offense.

The IRS Internal Revenue Manual's fraud guidance describes fraud as intentional wrongdoing intended to evade tax believed to be due. (Source)

Potential indicators can include deception, material misrepresentation, false records, concealed income, or knowingly improper deductions.

By comparison, IRC §7201 specifically addresses a willful attempt to evade or defeat tax or its payment. The concepts therefore overlap, but the terms should not automatically be treated as interchangeable.

What are the Consequences of Tax Evasion?

Tax evasion can result in both civil and criminal consequences, depending on the conduct involved.

Possible consequences of tax evasion include:

• Assessment of additional tax;

• Interest on unpaid amounts;

• Civil fraud penalties;

• Criminal investigation;

• Prosecution;

• Monetary fines; and

• Imprisonment following conviction.

Separately from a criminal tax-evasion charge, IRC §6663 - Imposition of Fraud Penalty provides a civil fraud penalty equal to 75% of the portion of an underpayment attributable to fraud.

Civil fraud penalties and criminal tax-evasion prosecution are separate consequences and should not be treated as the same proceeding.

Is Tax Evasion a Felony?

Yes. A willful attempt to evade or defeat federal tax or its payment under IRC §7201 is a felony.

The statute provides that a convicted individual may face a fine of up to $100,000, imprisonment of up to five years, or both, together with prosecution costs. The statutory maximum fine listed for a corporation is $500,000.

Can Tax Evasion Lead to Prison?

Yes. A conviction under IRC §7201 can result in imprisonment for up to five years, depending on the criminal case and sentence imposed.

Potential criminal tax violations are investigated by IRS Criminal Investigation, while criminal prosecutions are handled through the federal justice system.

Tax Evasion FAQs

Is tax evasion illegal?

Yes. IRC §7201 makes a willful attempt to evade or defeat federal tax, or its payment, a felony offense.

Is not reporting cash income tax evasion?

Intentionally concealing taxable cash income may contribute to a tax-evasion or fraud case depending on the facts and evidence. Failing to report income does not, by itself, establish the intent required for criminal tax evasion.

Is claiming a false deduction tax evasion?

Knowingly claiming fictitious deductions may be evidence relevant to fraud or tax evasion when combined with the required intent and surrounding conduct. The IRS indicators-of-fraud guidance includes improper or fictitious deductions among conduct that may warrant further examination.

Is hiding money offshore tax evasion?

Holding assets outside the United States is not automatically tax evasion. Tax-evasion concerns may arise when a person intentionally conceals taxable income, assets, or required information as part of an effort to evade federal tax.

Can the IRS prosecute tax evasion?

The IRS Criminal Investigation division investigates potential criminal violations of the Internal Revenue Code. Federal prosecutors, rather than the IRS itself, bring criminal prosecutions in court.