IRS Tax Evasion Penalties: All You Need To Know
WHAT IS TAX EVASION?
Some people get confused about two terms that are often used regarding taxes. One is tax avoidance and the other is tax evasion. While tax avoidance is legal (more on that later) tax evasion is not. Tax evasion is intentionally using illegal methods to avoid paying taxes. Someone is trying to evade taxes if they 1) evade assessment or 2) evade payment.
Evading Assessment
Some examples of evading assessment are:
- Filing a false tax return.
- Not filing a tax return.
- Filing false W-4s.
- Making a false statement to a treasury agent.
- Diversion of corporate funds to pay personal expenses.
- Consistently overstating deductions.
- Concealing bank accounts.
- Falsely holding your property in another’s name.
- Misrepresenting payments as gifts.
- Trying to conceal your income.
- Structuring cash transactions to evade the Bank Secrecy Act
Evading Payment
The offense of evasion of payment occurs after it is determined that a tax is due, and the amount owing is established. There are three elements to this offense: The Attempt; Additional Tax Due and Owing; and Willfulness.
The Attempt:
An attempt to evade or defeat the payment always involves some form of concealment of money or assets. Examples are:
- Concealing money and assets through family or coworker bank accounts. The money or asset hidden could have been used to pay taxes.
- Paying expenditures extensively by cash or using third-party credit cards.
- Maintaining an all cash lifestyle.
- Bankruptcy fraud.
- Placing assets in other people’s names.
- Transferring assets overseas.
- Omitting assets on a Form 433-A, “Collection Information Statement”.
- Concealing sources of income.
Additional Tax Due and Owing:
- Generally, the government must demonstrate the existence of a tax due and owing to prove tax evasion.
- However, the IRS can bring a tax evasion charge on an evasion of payment theory without a formal assessment of taxes owed. The theory goes, “Tax deficiency can arise by operation of law when there is a failure to file and the government later determines the tax liability.”
- The defendant has the right to dispute a tax deficiency charge by presenting rebuttal evidence and have a jury decide between the guilt on each element of the crime.
Willfulness:
- Willfulness is the “voluntary, intentional violation of a known legal duty.”
- Willfulness is subjective, so a defendant’s good faith belief that no tax violation has occurred, no matter how objectively unreasonable, is a defense in a tax prosecution.
- Indirect proof of willfulness is implied from any conduct which would mislead or conceal the truth.
- Conduct in which a willful evasion of payment can be determined is placing assets beyond the government’s reach after the assessment of a tax liability.
- Paying the taxes owed after a criminal investigation began will not negate any willfulness.
TAX EVASION PENALTIES
The statutory crime of tax evasion provides for these penalties:
- For attempting to evade taxes and upon conviction:
- Guilty of a felony.
- Up to 5 years in prison.
- Fine up to $250,000.
- Pay cost of prosecution.
- Subject to other penalties allowed by law.
- For conviction of fraud and false statements:
- Guilty of a felony.
- Up to three years in prison.
- Fine up to $250,000.
- Pay cost of prosecution.
- Subject to other penalties allowed by law.
- For willful failure to file a return, supply information, or timely payment of taxes upon conviction:
- Guilty of misdemeanor.
- Up to one year in prison.
- Fine up to $100,000.
- Pay cost of prosecution.
- Subject to other penalties allowed by law.
As anyone can see trying to evade taxes is fraught with all kind of danger. Before any problem arises, it is best to seek out professional help in all tax matters. It is never too late to avoid problems in the future.
SO, WHAT IS TAX AVOIDANCE?
Tax avoidance is using our tax laws to lower your taxes. The IRS defines it as, “An action taken to lessen tax liability and maximize after-tax income.” The way it works is by using credits, deductions, and adjustments to income your tax burden is reduced.
What Are Tax Credits?
Tax credits make the biggest impact on saving money on taxes because a credit directly lowers the amount you owe. A credit is a dollar for dollar reductions so always see if you qualify for a tax credit. Examples are:
- Child tax credits.
- Credit for child and dependent care expenses.
- Earned income tax credit
- Low-income housing credit
- American opportunity tax credit.
What Are Deductions?
Deductions apply for expenses like self-employment gains or losses, tuition, healthcare, and retirement savings. If you do not itemize your expenses, the standard deduction of $12,000 per individual and $24,000 per couple offers a wonderful opportunity. If your itemized deductions such as a mortgage payment and other expenses are over the standard deductions it is best to itemize your taxes.
What Are Adjustments?
Adjustments are other tax write-offs that reduce either your total or gross income. Adjustments are important because it lowers your overall income to the adjusted gross income and to taxable income. Some common adjustments are:
- Contributions to an IRA
- Half of self-employment taxes paid
- Alimony payments.
CIVIC TAX RELIEF: THE ANSWER TO YOUR TAX PROBLEMS
The professionals at Civic Tax Relief are here to help. “Our consultants, attorneys, Enrolled Agents and CPAs are committed to helping you understand the situation, form a plan of action and execute against that plan. We accompany you through the entire process—quickly and affordably—with the sole objective being successful tax resolution and restored peace of mind.”
Contact Civic Tax Relief today to learn all the options available to you for any tax problem you may be having.