What is tax evasion?

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If you’ve looked at your tax liability and thought, “Maybe a few little lies to lower my tax bill won’t hurt,” you’re not alone. No one looks forward to the tax season; if it were a choice, no one would voluntarily pay taxes. However, tax evasion is a federal crime, and it can have serious consequences — including up to five years in prison.


Key insights

Tax evasion is the failure to pay your taxes or underpaying taxes deliberately.

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Tax evasion is illegal, and it can result in a $100,000 penalty (for individuals), a five-year prison sentence or both.

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The IRS does its due diligence, and you’re only prosecuted for tax evasion if there’s sufficient evidence to prove you intentionally underpaid or failed to pay your tax debt.

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Tax evasion defined

Tax evasion is a failure to pay or a deliberate underpayment of taxes. It’s illegal and subject to penalties and criminal charges under the IRS code.

Gretchen Roberts, the CEO of Red Bike Advisors, a firm in Wilmington, North Carolina, that provides tax services to small businesses, described it this way: “Tax evasion is not paying taxes at all or deliberately underpaying by underreporting income, paying illegal workers in cash, hiding assets, claiming credits you can't substantiate, etc. You could end up with your bank account and possessions garnished and even with jail time for tax evasion.

You could end up with your bank account and possessions garnished and even with jail time for tax evasion.”
— Gretchen Roberts, CEO, Red Bike Advisors

In a nutshell, tax evasion occurs when a taxpayer misrepresents their income to the IRS to evade taxes. This can take the form of underreporting income, hiding money in offshore accounts or inflating deductions to lower their tax bill.

What happens if you don't pay your taxes?

Tax evasion can lead to criminal charges. Proof of the crime requires:

  1. Proving an unpaid tax liability exists
  2. Proving an act to evade or try to evade a tax
  3. Proving intent to evade a known legal duty to pay

If the government can prove all three elements beyond a reasonable doubt, a person can be convicted of tax evasion.

According to the IRS, the penalties for tax evasion include a fine of up to $100,000 for individuals ($500,000 for corporations), imprisonment of up to five years or both. The defendant also must pay the costs of prosecution.

What's the difference between tax avoidance and tax evasion?

The U.S. income tax system is based on voluntary compliance, allowing taxpayers to freely report their income, calculate their tax liability and file their tax returns on time. Tax evasion happens when taxpayers try to manipulate the system to evade tax. One way people evade tax is by failing to report all their income. It could be from their legal side hustles or illegal activities such as selling stolen goods. Regardless of the reason behind tax evasion, it’s illegal.

In contrast, tax avoidance is legal. IRS regulations allow taxpayers to claim certain deductions, credits and income adjustments. For example, if you contribute to an individual retirement account (IRA), you can deduct your contribution from your taxable income. This kind of tax relief is perfectly legal as long as you’re eligible.

Tax evasion examples

Tax evaders use all sorts of creative ways to evade tax. Here are some examples:

  • Underreporting or omitting income
  • Willfully concealing offshore bank accounts
  • Hiding interest
  • Intentionally failing to file all types of tax returns
  • Operating a business in another person’s name
  • Keeping different sets of books for your business

» COMPARE: Best tax software and services

How does the IRS find tax evaders?

Criminal investigations can be initiated within the IRS when a revenue agent (auditor) or investigative analyst detects fraudulent activities or receives a tip from the public. Special agents analyze the information to determine whether criminal tax fraud or another financial crime has occurred. The supervisor approves or declines further development once this preliminary process (the primary investigation) is over.

If the investigation is opened, agents use various investigative techniques to obtain violations, such as executing search warrants, interviewing third-party witnesses, subpoenaing bank records, reviewing financial data and conducting surveillance.

The case can be referred for prosecution if substantial evidence remains after all the evidence is gathered and analyzed.

According to the IRS, if there is not enough evidence to substantiate criminal charges, an investigation is discontinued.

Owe the IRS thousands? See if you qualify for relief.

FAQ

What happens if you don't file your taxes?

If you don’t file your taxes, you will be subject to a failure to file penalty. The IRS will send you a notice or letter and calculate a penalty based on the taxes you didn’t pay on time. If you can’t file your return or pay on time, you can apply for an extension or payment plan.

Can you go to jail if you don't pay your taxes?

The IRS has a failure to pay penalty for not paying taxes when they are due. This is a financial penalty that won’t exceed 25% of unpaid taxes. If you use illegal means to not pay taxes, you can be prosecuted for tax evasion, which carries a maximum imprisonment term of five years.

Is tax avoidance illegal?

No, tax avoidance isn’t illegal — it involves legally taking deductions, credits or income adjustments to lower the taxes you pay.

Bottom line

Paying taxes is no fun. But the consequences for hiding income from the IRS can be harsh. Research and take advantage of legal tax avoidance strategies to keep more money for yourself; reach out to a tax professional if you have questions.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. IRS, “The Difference Between Tax Avoidance and Tax Evasion.” Accessed Oct. 9, 2024.
  2. IRS, “How criminal investigations are initiated.” Accessed Oct. 9, 2024.
  3. Cornell Law School Legal Information Institute, “tax evasion.” Accessed Oct. 9, 2024.
  4. IRS, “Failure to Pay Penalty.” Accessed Oct. 9, 2024.
  5. IRS, “Failure to File Penalty.” Accessed Oct. 9, 2024
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