Define: Tax Evasion

Tax evasion is the deliberate underpayment or non-payment of taxes through deceptive and illegal means. Overstating deductions and exemptions, claiming deductions to which one isn’t entitled, and underreporting income are common tax evasion tactics. Illegal tax shelters such as a limited partnership that overstates the market value of acquired property is another common tax evasion tactic. Payroll fraud is a typical form of business tax evasion. This method of tax evasion typically entails retaining employee withholdings, filing a false payroll return, or paying employees in cash. Another tax evasion scheme is the abusive trust which uses a series of vertically integrated trusts to disguise transactions or conceal the true owners of income. This tax evasion tactic is often targeted at small business owners and wealthy individuals. Tax evasion is distinct from tax avoidance, which entails using all available legitimate deductions, deferrals, and credits to reduce tax liability. Entities caught engaging in tax evasion have to pay back taxes and significant penalties, and may be subject to criminal prosecution.

Legally, anyone who avoids paying taxes is guilty of tax evasion. Sometimes, taxpayers that make simple errors on their tax returns can be held liable for penalties; however, the IRS usually chooses to go after those that repeatedly fail to pay their fair share of taxes.

All US citizens and residents are required to pay federal taxes, which go to the Internal Revenue Service. If a person fails to file a tax return, then this can be legally classified as tax evasion. In addition, tax evasion also occurs when a person purposefully falsifies a tax return in order to reflect a lower tax liability. This can include failing to include additional sources of income, adding on additional expenses with no proof, or not filing a specific type of tax return at all. While the IRS typically goes after citizens and residents that are in a higher tax bracket, they also routinely prosecute those who have failed to pay taxes for a number of years.

Because many taxpayers use the services of CPAs and other tax consulting services, the IRS does not always view a mistake as tax evasion. For example, when the wrong type of tax form is filed, the IRS will give the taxpayer the opportunity to fix his or her mistake. The IRS will not tack on any interest or penalties in these situations. Tax evasion also includes any income that is transferred to an overseas bank account for the purposes of avoiding tax liability. Historically, tax evasion charges have been used to prosecute members of organised crime when law enforcement agencies are unable to investigate their suspicions. Anyone who is charged with tax evasion should immediately hire legal representation. The penalties for tax evasion can be steep, including lengthy prison sentences. Usually, the federal government will formally charge those suspected of tax evasion, but state-level agencies can also bring about similar charges. Rarely, there have been some people who have recently immigrated to the US who have been accused of tax evasion. If they can prove that they were ignorant of the law, then charges will usually be dropped.

Some citizens who protest government policies refuse to pay taxes, and they too are regularly charged with tax evasion. Because of the controversy surrounding the formation of the Internal Revenue Service in the 1930s, there are those who are convinced that federal taxes are unconstitutional. Because not a single protester has been able to prove his or her case, the federal government stands behind the tax evasion law and pursues anyone that they believe is guilty of this crime. Several public figures have been accused of tax evasion, forfeited their assets, and served long prison sentences for their crimes.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 10th April, 2024.