What You Need to Know About Tax Evasion Laws

Tax evasion is when an individual or entity deliberately conceals taxable income or assets to avoid paying their fair share of taxes to the Internal Revenue Service (IRS). It has a broad definition, but it empowers the IRS to seek justice against those who plan to defraud the system. In other words, any misstatement is a red flag.

In simpler terms, tax evasion involves a person or entity misrepresenting their earnings to the Internal Revenue Service. Actions that may constitute misrepresentations include inflating deductions, hiding money in offshore accounts, underreporting annual earnings, and hiding taxable funds. 

Examples of Tax Evasion

There are various instances of tax evasion, including:

Personal income tax evasion happens when you misrepresent your earnings or other factual data.

Employment tax evasion happens within the employment system. It entails falsifying payroll, evading employment taxes, paying workers cash, pyramiding, and leasing employment. 

Business tax evasion is a type of business-related tax fraud. It includes claiming false deductions, transferring or hiding income or assets, intentionally underreporting or removing income, inflating deduction amounts, hiding personal expenses under business, and making false statements in records or books. 

When the IRS Can Charge You with Tax Evasion

The Internal Revenue Service generally has three years to audit a tax return, but this period can be extended to as much as six years in certain cases. However, the agency can audit an individual for as long as it wants. 

The IRS must prove the following in tax evasion matters:

• The existence of an unpaid tax liability

• The defendant attempted to hide their taxable income to avoid paying taxes on their earnings

• The defendant intentionally wanted to evade their legal obligation of paying taxes

• The jury must pronounce the defendant as being guilty of each feature beyond any reasonable doubt

The Criminal Consequences of Tax Evasion

Tax evasion is a criminal offense in the US. The consequences include heavy financial fines, imprisonment, or both. The specific penalties may include a 75 percent civil punishment, up to $250,000 fines for individuals and $500,000 fines for entities, up to five years of imprisonment, and court charges and attorney’s fees. 

Shedding Light on Tax Fraud

Tax fraud entails willful and intentional falsification of information by a person or corporation on their tax return to evade fulfilling their entire tax duty. The IRS aims to discourage breaches by announcing convictions for tax fraud, evaluating fines, penalties, and civil taxes, and demanding jail terms for culprits because the US runs a self-assessment or voluntary compliance tax system. 

Examples of tax fraud include hiding a personal expense under business expenses, intentionally dodging due taxes, claiming a false deduction, intentionally underreporting all earnings, filing a false tax return, willfully neglecting to file an income tax return, and keeping mute on earned income. 

The Difference Between Income Tax Fraud and Negligence

Due to its complexity, most people need help comprehending the federal US Tax Code. If you commit an error due to this complexity, the IRS will assume it is an honest mistake for as long as there are no traces of sharp practices. It is not an intentional evasion of the US tax code.

In such circumstances, the tax auditor may regard the error as negligence. Despite being an "honest mistake," the IRS may give you with a 20 percent fine for the underpayment. 

A tax auditor considers some fraudulent acts and suspicions to differentiate between willful breaches and negligence. The factors include:

• Falsifying documents

• Intentionally underreporting earnings

• Using false Social Security number

• Inflating deductions and exemptions

• Transferring or hiding income

The Repercussions of Income Tax Fraud

Income tax fraud has severe implications. You may face civil and criminal penalties for intentionally avoiding paying your income taxes. The specific fraud will determine your punishment. 

You will face felony charges if the authorities accuse you of tax evasion. You will face the following repercussions after your conviction:

• A maximum of five years in prison

• A maximum of $250,000 fines for individuals and $500,000 for entities

• The two punishments with prosecution costs

You may also face other penalties that the law specifies for your case. 

Similarly, you are guilty of a felony if the court convicts you of false statements and fraud. The penalties for this conviction include a maximum of three years in prison, a fine of $250,000 and $500,000 for individuals and corporations, respectively, and both in some circumstances with prosecution fees. 

The Difference Between Tax Evasion and Negligence

A negligent tax error occurs when you carelessly calculate or pay your taxes without any intent to outsmart the IRS. You are unaware of the error until someone calls it to you. While negligent tax error is not a crime, you may face civil consequences for the mistake.

Conversely, tax fraud is when you willfully aim to defraud the revenue agency. You cannot feign ignorance in a tax fraud because there would be footprints of your intentionality in the process. You purposely indulged in the crime and understand its consequences when the authorities investigate and convict you. 

Probable Defenses When Accused of Tax Evasion

You can defend yourself in many ways if the authorities accuse you of tax evasion. The defenses include insanity, entrapment, statute of limitations, insufficient proof, mistake, or willful conduct. 

To convict you of tax evasion, the prosecution must prove that you intentionally wanted to avoid paying taxes. For instance, you can argue that you did not file your tax returns because you forgot to do so, which may convince the judge to dismiss the matter. 

Further, there is a time limit on when the prosecution can file a claim. This is known as the "statute of limitations." That is, tax evasion charges have a time limit. 

“The IRS cannot institute a tax evasion claim against you after the statute of limitations has passed, even if they have all the evidence against you. The time limit for tax evasion in the United States is six years,” says tax evasion attorney John Pontius of Pontius Tax Law, PLLC. 

You could use the mistake as a defense if you made a mistake calculating when your taxes are due or what the authorities demand you to report. However, it is insufficient to claim you were unaware you needed to file your tax returns. No one will accept that as a mistake defense from you. 

Entrapment happens when the government forces an innocent person to commit an offense they would have avoided. If this is your case, you can use entrapment as a defense. However, merely giving you the platform to commit an offense that you yield to is not enough to be an entrapment. 

You can also claim insanity, but it is challenging to establish. You may claim to be insane during the crime or while undergoing trial. However, this defense may be impotent in a tax evasion case, and you should refrain from using it. 

The government bears the burden of proof; it must convince the judge that you intended to evade filing or paying your income taxes. It must also establish that you are aware of the consequences of the criminal act to convict you.

Engage a Tax Evasion Lawyer

You can contact a local tax attorney to help you when you face a tax evasion case. It will be to your detriment to ignore engaging a reputable tax evasion lawyer because the consequences of a conviction can be severe and unimaginable. Also, the government has a team of prosecutors and attorneys to fight you to a standstill. 

A tax evasion attorney will protect your rights, evaluate your case, and represent you at all levels. They will deploy their expertise to help you avoid falling into a life-altering pit.