Everything you need to know about tax evasion

Tax evasion has been a hot topic recently, with endless coverage of the Trump organization’s alleged mishandling of funds to avoid paying taxes. 
And while you may understand terms like “fringe benefits,” “non-cash payments,” and “grand larceny,” do you know what actually constitutes tax evasion, and how it relates to the average working individual?

Federal regulations can be complicated, so understanding what tax evasion is can help you avoid unintentionally wading into legally dangerous territory. Below we outline the definitions, examples, and consequences you need to know.

What is tax evasion? 

Simply put, tax evasion is an illegal act where a taxpayer avoids paying their full tax liability. Tax evasion has its very own section within the United States Internal Revenue Code. According to Section 7201, there are two kinds of tax evasion schemes.

• Evasion of assessment: “The most common attempt to evade or defeat a tax is the affirmative act of filing a false return that omits income and/or claims deductions to which the taxpayer is not entitled,” said Alex Oware, a licensed CPA with JustAnswer.

Basically, this amounts to knowingly lying on your tax return in such a way that you appear to owe less than you would if you were forthcoming about all of your income.

• Evasion of payment: When you’ve filed your taxes and are presented with an amount due, you’re supposed to pay it. If you don’t, it could be considered evasion of payment.

“This offense generally occurs after the existence of a tax due, and owing has been established (either by the taxpayer reporting the amount of tax or by the IRS assessing the amount of tax deemed to be due and owing) and almost always involves an affirmative act of concealment of money or assets from which the tax could be paid,” Oware explains.

In both of these instances, Oware said, “The government must demonstrate the existence of a tax due and owing, i.e., a tax deficiency, to prove tax evasion.”

What are the consequences of tax evasion?

As one might glean from media coverage on the topic, the consequences of tax evasion can be steep. This includes being charged with a felony and facing substantial prison time.

Those found guilty of tax evasion can be fined up to $100,000 for tax evasion, and corporations may face larger fines of up to $500,000. Prison time is also on the table for those who evade taxes, with a punishment allowance of up to five years of imprisonment (in addition to the fines) for the offense.

Above and beyond the potential for both fines and imprisonment, litigation surrounding tax evasion can be expensive. Taxpayers found guilty are also still on the hook for the taxes they avoided, and then some. 

“When found guilty of tax evasion, the taxpayer will be required to bear the cost of the prosecution as well,” Oware said. “On top of all the above, the taxpayer is still required to pay the taxes assessed, including all accrued interest and penalties originating from the tax return in question.”

Examples of acts of tax evasion

There are several actions that are commonly considered to constitute tax evasion or evidence of tax evasion. They can include:

• Keeping a double set of books
• Making false or altered entries
• Creating false invoices
• Destroying records
• Concealing sources of income
• Handling transactions to avoid usual records
• Filing a false tax return or false amended return
• Filing false and fraudulent W-4 forms
• Corporate officer’s diversion of corporate funds to pay for personal expenses
• A consistent pattern of overstating deductions
• Concealment of bank accounts
• Doing business under diverse names
• Keeping large sums of cash in safe deposit boxes in numerous banks
• Structuring cash transactions to evade the filing of Bank Secrecy Act reports

Though many of these pertain to filings by businesses, individuals can also commit tax evasion by filing forms with false information, concealing sources of income, and similar actions.

How to handle your taxes with confidence

To avoid the potential consequences of tax evasion, you must be meticulous about following the rules.

“The taxpayer must have the will to be compliant, and must employ safeguards that mitigate or avoid all the acts listed [above],” Oware said. “The need for taxpayers to comply and fulfill their duties under the tax code, whether federal or state, is paramount.”

And that also applies to certain types of income that aren’t explicitly described in the tax code but are still considered taxable. Oware also says that there are certain types of income “not expressly specified in the Code, but nonetheless, they are taxable income,” which must be reported. He explains that “Taxpayers must make reasonable or absolute effort to report and pay taxes on them at all times.”

For individual taxpayers, examples of this type of income include money earned from gambling or gains from illegal activities like the sale of narcotics or prostitution. Additionally, campaign contributions used for personal purposes and loans received without intent to repay also fall into this category.

For corporations, even things that might seem like income reporting loopholes — embezzlement, extortion proceeds, fraud income, and kickbacks, to name a few — all actually count as taxable income.

It really all boils down to doing your due diligence to make sure that the income you are reporting and filing is 100% correct and that you pay the appropriate amount. If that means hiring a CPA or accountant to help out, it’s worth the expense to avoid making a mistake that could result in major consequences if not done correctly.