Tax evasion in a crime in which an individual or entity intentionally underpays, or avoids paying, taxes. Every year, each citizen who has income and/or assets is required to file a tax return. Each year many people misrepresent how much money they earned, and claim deductions to which they are not entitled in an effort to keep their money away from the IRS. The U. S. Government estimates that more than $300 billion is lost each year due to tax evasion. To explore this concept, consider the following tax evasion definition.
Definition of Tax Evasion
- The non-payment of taxes by means of not reporting all taxable income, or by taking unallowed deductions.
What is Tax Evasion
Tax evasion is the criminal act of using illegal means to avoid paying taxes. Tax evasion schemes are plentiful, but all involve the misrepresentation of an individual’s or business’ income and/or assets when reporting to the Internal Revenue Service, in order to reduce the amount of taxes they owe.
Tax evasion activities include:
- Underreporting income
- Inflating deductions or expenses
- Hiding money
- Hiding interest in offshore accounts
Title 26 of the U.S. Code, section 7201 states, “[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
This means that intentionally attempting to evade paying taxes is a felony criminal act, each count of which carries a hefty fine, and a prison sentence. In addition, the perpetrator is held responsible for paying the prosecution’s costs of the criminal procedure.
Elements of Tax Evasion
According the federal laws in the United States, tax evasion is a serious crime. A successful conviction requires that the prosecution prove certain specific elements, however. If one or more of the required elements is missing, the defendant may avoid prosecution. Required elements include:
- The unpaid tax liability does exist
- The defendant took specific actions to evade, or in an attempt to evade, paying a tax
- The defendant had a specific intent to evade his legal duty to pay a tax
Maggie is a server at a popular steakhouse, where she earns an average of $200 per night in tips. Her employer does not keep track of the servers’ tips, relying on each one to write the total down in a log book. In an attempt to lower her income tax obligation, Maggie intentionally reports on her tax return only that small amount she wrote in her employer’s log, which averages about $50 per night.
Because servers are required to report their tips as income, the tax liability does exist, Maggie took specific action throughout the year with the intent to evade this tax obligation. Maggie has committed tax evasion, which is a felony crime.
Tax Evasion or Mistake
Tax evasion is not the same as making a mistake. Since tax forms can be complicated, mistakes can, and do occur. If an individual files his taxes after having made a mistake on the tax return forms, he would not face tax evasion charges. In order for an individual or business to face criminal tax evasion charges, the Internal Revenue Service must prove that the underpayment was intentional. If the underpayment was due to an error, the taxpayer will likely be required to pay the deficient amount, and possibly a small fine, or interest on the amount. If the fines are not paid however, criminal charges could be filed against the defendant.
Tax Evasion Penalties
If a person willfully commits the act of tax evasion, he may face felony charges. Tax evasion penalties include imprisonment of up to five years, and fines as high as $250,000. The defendant may also be ordered to pay for the costs of prosecution. Other tax evasion penalties include community service, probation, and restitution depending on the circumstances of the case. Tax evasion penalties can be harsh, depending on the severity of the crime. This is to deter people from attempting to dupe the IRS.
Tax Evasion Example Case
In 2005, American entrepreneur Walter Anderson was arrested after the FBI discovered he was involved in the largest tax evasion case in United States history. Anderson grew up in Maryland before beginning a career as a salesman at MCI Communications. He entered the world of entrepreneurship in the early 1980s, when he invested in several companies that were eventually sold for profit. By 1988, he became a backer of the International Space University, also serving on its Board of Directors. In the years that followed, Anderson made several more large business investments in space ventures.
Anderson’s arrest came after a years-long investigation into his personal and business financial activities, based on a suspicion that he was committing tax fraud by hiding money in offshore bank accounts.
Seven months later, Anderson pled guilty to two counts of felony federal income tax evasion. This charge was the result of his failing to report over $126 million of income for year 1998, and more than $238 million of income for year 1999. Anderson had claimed he earned only about $67,000 when he filed is federal tax returns, on which he paid only $495 in taxes. Anderson entered into a plea agreement with the prosecution, in which he admitted to having hid over $300 million in offshore and secret accounts.
Instead, he claimed he earned a little over $67,000 when he filed taxes. Anderson entered into a plea agreement with the prosecution and admitted to hiding over $365 million in shell companies, offshore accounts under alias names, and other secret accounts.
The court sentenced Anderson to prison, and spent only 6 years in a minimum security facility. Additionally, Anderson was ordered to pay $23 million in restitution to the District of Columbia government, but got off for the $175 million restitution to the federal government, because of a typographical error on the plea agreement contract. Anderson was released from prison in 2012.
Related Legal Terms and Issues
- Asset – Any valuable thing or property owned by a person or entity, regarded as being of value.
- Business Entity – An organization established and existing apart from any other interest, business or personal.
- Criminal Act – An act committed by an individual that is in violation of the law, or that poses a threat to the public.
- Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
- Felony – A crime, often involving violence, regarded as more serious than a misdemeanor. Felony crimes are usually punishable by imprisonment more than one year.
- Intent – A resolve to perform an act for a specific purpose; a resolution to use a particular means to a specific end.