Tax Crimes 101: What Is Considered Tax Evasion?
Are You Anxious About Your Taxes?
Tax season causes many people a lot of anxiety. Taxes are notoriously complicated, but there is also the perception that one small error can land you in jail. While a mistake may result in an audit, it doesn't automatically mean you are going to jail or that you committed a tax crime. In particular, people are worried about being accused of tax evasion.
Tax evasion occurs when someone (or a business) intentionally avoids or fails to pay the taxes they owe. This is illegal under US Tax Code § 7201. According to this statute, "any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, […], be guilty of a felony." According to the law, the penalties for tax evasion include fines up to $100,000 (or $500,000 for a corporation) and/or up to five years in prison. Additionally, if found guilty, the convicted party will also be responsible for the costs associated with the prosecution.
Famous Tax Evasion Cases
Perhaps the most famous tax evasion case was that of Al Capone. In 1931, he was convicted of five counts of tax evasion, for which he received 11 years in prison. Another well-known tax evasion case is the more recent situation involving actor Wesley Snipes. In 2008, Snipes was convicted of three counts of failing to file his tax returns, and despite his appeal attempt, he received three years in prison.
A famous tax evasion case for which the convicted party did not receive jail time was that of Willie Nelson in the 1980s. After being investigated over an illegal tax shelter, Nelson received a $16.7 million tax bill (later, this was reduced to $6 million). When he couldn't make payments, the IRS seized nearly all of his property. His case was resolved with a revenue-sharing agreement in which Nelson used the proceeds from a new album to pay down the amount he owed the IRS.
Am I Guilty of Tax Evasion?
Because of these high-profile cases, many taxpayers are very worried about being falsely accused of tax evasion. However, it is very unlikely that you will be investigated or charged with a tax crime, especially over a small mistake on your taxes. In fact, tax evasion (and other tax crimes) are statistically rare.
According to information released by the IRS, in 2020, nearly $2.3 billion in tax fraud schemes was identified, with 1,600 investigations initiated by their Criminal Investigation Division. Though this may seem like a lot, you should remember that nearly 170 million tax returns were filed in 2020.
However, if you believe you are under investigation for a tax crime, like tax evasion, you should reach out to an experienced attorney right away. Your lawyer can help evaluate your situation and represent you should the IRS bring charges against you.
Other Tax Crimes
Tax evasion is perhaps the most well-known tax crime. However, there are many other ways someone may commit a crime while filing their taxes. The key to identifying a tax crime is intention. While many people make mistakes on their taxes unwittingly, the IRS considers it a crime when someone intentionally falsifies information or fails to file their taxes.
Other tax crimes can include:
- Failure to pay taxes
- Failure to file a return
- Filing a false return
- Claiming false deductions
- Claiming false business expenses
- Underreporting income
- Using a false social security number when filing
When investigating these cases, the IRS will investigate whether the error was intentional or due to taxpayer negligence. In cases of negligence, they may still fine the taxpayer. If it is determined that the individual intentionally committed a tax crime, the IRS is much more aggressive in pursuing charges.
Is Tax Avoidance a Crime
Some people erroneously conflate tax avoidance with tax evasion, but they are not the same thing. Tax avoidance occurs when someone uses legal loopholes in tax law to reduce their tax obligation. Tax avoidance is not illegal, but it is often frowned upon. Usually, when someone is looking to decrease their taxable income and thereby avoid paying more in taxes, they will utilize tax shelters.
A tax shelter is a place where someone can store their money and which has a favorable tax treatment, such as a retirement account or investment account. While there are many legal tax shelters, such as an employer-sponsored 401k, some may be illegal. If you are looking to use tax-reduction strategies, you should consult with a certified tax preparer or a CPA to ensure that you are not running afoul of US tax laws.
This year, taxes are due on Monday, April 18, 2022. Because US tax laws are so complicated, it is important that you ensure that your taxes are completed accurately and filed on time. If you are accused of or charged with a tax crime, you need to reach out to an experienced attorney. At Daniels & Taylor, P.C., we have helped many people fight tax crime charges, and we can use our experience to fight for you. Send us a message online to schedule an appointment.