What is Tax Evasion – Everything You Need To Know

examples of tax evasion

Taxes are government funds used for various public investments and different social programs. It aims to boost the country’s economy to achieve the general goal of having an orderly, prosperous, safe, and functional society. To do that, the government will initiate helpful projects that the citizens of the country will benefit from, like education, health, infrastructure, roads and highways, security, and many others. Hence, to make all of these things become a reality, everyone must pay their legal taxes every year. 

Moreover, there are different types of taxes, including personal income taxes, property taxes, sales taxes, and the like. These funds will be collected every year, and every taxpayer is required to process their returns voluntarily and honestly. Unfortunately, however, many people will intentionally commit fraudulent activities to either minimize their tax liabilities using unlawful methods or not submit the necessary forms and documents and process the payment on purpose. 

In fact, the rate of tax evasion cases across the country continues to increase. However, the IRS also doesn’t stop searching for effective ways to lessen the number by implementing laws and penalizing those who have been proven guilty of committing tax evasion. Hence, to get to know more about tax evasion, check the complete details below.

Definition of Tax Evasion

What is the meaning of tax evasion? Tax evasion is when a person uses an unlawful method to intentionally avoid tax obligations. It’s a criminal offense under the tax code of the Internal Revenue Service or IRS. It could be not paying the exact amount of the income tax return or deliberately not filing and paying the tax liabilities. That’s why if anyone is proven guilty of committing tax evasion after a thorough investigation of the IRS Criminal Investigation will surely face various consequences, like monetary penalties and even years of imprisonment. 

What is Considered Tax Evasion?

If you’re underpaying taxes by hiding other sources of income and profit, and even not filing your return on time and intentionally not paying your tax obligations, these are what is considered tax evasion, and you’ll receive the corresponding charges. Besides that, even if you didn’t file the necessary documents and forms, the IRS will still know your owed tax liabilities from the information presented by your employers. 

As mentioned earlier, the IRS Criminal Investigation team will conduct thorough research to look for relevant evidence that will prove you’re guilty of this criminal offense. However, if it shows that you didn’t do it intentionally when you failed to file the form and pay your owed taxes, you’ll be safe and won’t be considered guilty. 

Examples of Tax Evasion

To further understand tax evasion, check these two examples below. 

Not Reporting the True Amount of Taxable Income

Sam is a regular employee of a particular company in the US, and his wife is also working as a sales marketer of a specific brand. Both of them are working hard to earn more and increase their savings. That’s why after a few years, they are able to open some small stores nearby. However, since they don’t want to leave their jobs, they hired a few people to keep an eye on their stores. 

Then, the more they increase their income, the more taxes they need to pay. Because of that, Sam and his wife decided not to declare their stores as theirs when they filed their return in the IRS. They thought that the IRS wouldn’t find out because nobody had seen them in their stores as they spent most of their time at work. Hence, both the husband and wife committed tax evasion with that intentional action for the entire year. 

Paying in Cash

Orlan owns two small construction companies in the country. He just started to venture into business. That’s why he is still learning new skills and strategies to ensure he’ll be getting back his investment as soon as possible. However, when he found out the tax liabilities he should pay, he decided to find ways to minimize the tax amount. 

Then, he talked to some of his employees and encouraged them to receive their compensation in cash to avoid the hassle of the long payroll processes. His workers said yes and accepted the offer. That’s why the total taxes that Orlan processed in the IRS was less than the actual amount he owed. With that intentional action, Orlan has likely committed tax evasion. 

Consequences of Tax Evasion

As previously mentioned, after the thorough investigation of the IRS Criminal Investigation team, and you’re proven guilty of such an offense with the presented documents and other evidence showing that you did it intentionally not to file and pay your tax obligations, you’ll receive the corresponding charges in the court of law. 

Criminal Charges for Tax Evasion

Tax evasion is the primary tax revenue offense according to the IRS tax code section 7201. This particular section states the two potential federal crimes of tax evasion, such as the intentional attempt to defeat the tax liability and the deliberate attempt to evade income tax assessment. Hence, these two fraudulent activities are considered federal crimes in the country that require penalties and even imprisonment. 

Penalty

If you’re proven guilty of committing tax evasion after the documents and evidence gathered and presented by the IRS Criminal Investigation department, you’ll definitely be paying a monetary penalty. The amount is not more than $100,000, and for any corporations committing the same federal offense will also need to process the penalty amounting to $500,000. Besides that, you still need to settle your delinquent owed tax returns in the IRS. But, if you still can’t pay your return right away, it’ll continue to increase over time. 

Jail Time

Besides paying the monetary penalty, the person committing tax evasion will also suffer from imprisonment. This particular federal offense will require you to be in jail for 3 to 5 years. You may find some information on different websites online that will scare and tell you about getting imprisoned for every little mistake you made in the IRS. However, when it comes to committing tax evasion, that will definitely be one of your consequences to face.

Difference Between Tax Evasion & Tax Avoidance

Even if both terms would mean avoiding paying taxes, tax evasion and tax avoidance have completely different definitions. Tax avoidance is legal in the US. It’s when you use any lawful methods to minimize the total amount of your tax liability. For example, if you’re a homeowner, you may claim a particular tax deduction for the interest you’re regularly paying for the mortgage. 

Besides that, if both parents are working and no one can take care of their children every day, the IRS will also grant them tax deductions for expenses in any child-care services. These are some examples of tax evasions. You can claim either tax deductions or credits. As you can see, the methods used to minimize the total tax liability are all legal. 

On the other hand, tax evasion is illegal in the country. It’s when people use unlawful methods to lessen their total tax liability or not processing the payment at all intentionally. One example is when taxpayers failed to submit their returns to the IRS and settle their tax obligations on purpose. Hence, when you’re proven guilty of committing this federal offense, you’ll surely face penalties and even imprisonment.

How Common is Tax Evasion

The case of tax evasion continues to increase across the country. The rate of underreporting of taxable income is much higher than the profit that farmers and sole proprietorships are earning. Besides that, tax evasion is quite common to people with higher income to generate every year than those receiving much lower compensation. In addition, the rate of cases in tax evasion varies depending on the type of taxes, but it’s likely higher for cases in taxable income. 

How to Report Tax Evasion?

What is Tax Evasion
Tax evasion can be reported to the IRS anonymously.

If you’ve suspected that a person or a company is not process the payment for the true amount of tax liability, you have to use and fill out the form 3949-A that you may also find and download on the official website of the IRS. Besides filling out the form, you can also send a letter to the IRS office. You have to make sure to write all the necessary details and information. 

You have to include the complete address and name of the business or person you want to report. If you can get the employer identification number or the Social Security Number, it’ll also be a big help. Besides that, you also have to write in detail about how you get the information that made you suspect that person or business committing tax evasion. 

In addition, you also have to include your contact details, name, and address. After sending the said form or the letter, you won’t get any updates because of the tax return confidentiality. The IRS will ensure that your identity is secure even before, during, and after the investigation. 

FAQs

What is the penalty for tax evasion?

If you’re proven guilty of committing tax evasion after the investigation of the IRS Criminal Investigation team, you’ll be required to process payment for monetary penalty of up to $100,000. However, corporations have to settle a maximum of $500,000. On top of that, the defendant still needs to pay his owed taxes to the IRS. Otherwise, the delinquent tax return will continue to accumulate interest over time. Besides the monetary penalty, the convicted of tax evasion may also suffer from imprisonment. 

Can you go to jail for not paying taxes?

Those taxpayers who did not file the necessary forms and documents and process the payment for the income tax return on purpose, that’s tax evasion. It’s a federal offense that will make you pay monetary penalties and even spend years in prison. However, after the IRS investigation and it shows that you did not do it on purpose, you’ll be safe and won’t be charged for tax evasion. 

What is jail time for tax evasion?

After you’re proven guilty of committing tax evasion, you have to pay the penalty amounting to $100,000, and the corporations have to settle $500,000. On top of that, you also have to spend 3 to 5 years in jail. Hence, to avoid any of these consequences, all taxpayers should be mindful of filing the form and processing payment for their returns on time.  

What is the minimum sentence for tax evasion?

Tax evasion is a serious federal offense that the state will deal with those who commit accordingly. The minimum sentence for people who have been proven guilty of doing the crime will suffer at least three years in jail and process the payment amounting to less than $100,000, and the corporations need to settle less than $500,000. 

What happens when you report someone for tax evasion?

After filling out the form or writing the letter, you can send them now to the IRS. After that, you won’t hear updates from the office about the report you’ve submitted due to the security of your identity. However, once the IRS Criminal Investigation team starts their job, they will get in touch with you using the information you’ve provided when you filed the report. These people will look for evidence to prove that you are right with your statement, and those people you’ve suspected will be proven guilty of committing the said tax evasion. 

Is Tax Evasion a Crime?

Tax evasion is considered the primary tax revenue offense in the country according to section 7201 of the tax code of the Internal Revenue Service. This particular tax code section states the particular crimes of tax evasion, including the intentional attempt to evade the tax obligations and the deliberate attempt to defeat the income tax assessment. These two activities stipulated on the tax code are federal crimes that will result in monetary penalties and even spending years in jail. 

Conclusion

Paying taxes is a legal monetary responsibility of every taxpayer in the country. That’s why whenever you don’t comply with the tax laws mandated by the government of the United States, you’ll definitely encounter corresponding consequences and penalties. Hence, you should always be aware of your tax obligations every year and file your form and documents on time to avoid going through any of these in the future. 

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