Tax evasion is any willful, systematic attempt to avoid paying federal taxes by falsifying documents or avoiding reporting requirements. Experts estimate that hundreds of millions of dollars in federal taxes go unreported every year in the United States. Of these, the majority is believed to “disappear” through unreported income that does not have a sufficient paper trail for the Internal Revenue Service to track.
However, federal tax evasion laws are much more complex than simply failing to report income. Over the last ten years, international cooperation has grown steadily in attempts to prevent people from hiding income in foreign banks, especially Swiss banks. Any fraudulent material change which allowed revenue, financial instruments, or other assets to go untaxed or to go taxed at a reduced rate may be considered federal tax evasion.
Tax Evasion Laws
Tax evasion is distinct from tax avoidance, the completely legal process of structuring one’s financial assets and investments so as to reduce the tax burden that accrues to those assets. With the help of a competent financial professional, it becomes possible to engage in aggressive tax avoidance without breaking federal laws. Although it is certainly possible to avoid taxes at the state level, the majority of tax evasion prosecutions focus on federal income taxes.
Tax Evasion Crimes & Charges
In order to be prosecuted under federal statute, tax evasion must first be proven to be intentional and not to stem from either an error or a difference of opinion. Tax evasion that is proven to be intentional is a felony crime as defined by Section 7201 of the Internal Revenue Code. In order to prove the crime, the IRS or other authorities must take several important steps:
- Authorities must first prove that an unpaid tax liability exists.
- They must then prove that affirmative action was taken on the part of the defendant to evade the tax in question.
- They must then prove that the defendant had “specific intent” to evade a known duty to pay a certain tax or a certain amount of taxes.
The burden of proof for tax evasion is beyond a reasonable doubt. A jury cannot convict anyone for tax evasion unless all three of the above aggravating circumstances are present and can be proven according to that standard by prosecutors.
Tax Evasion Punishment
Although the focus of most tax evasion cases has to do with recovering the money involved, tax evasion is a federal offense that can include other penalties. Tax evasion is believed to be responsible for more than $345 billion in lost revenues each and every year, so the pursuit and collection of unpaid taxes is one of the most significant factors in any tax evasion prosecution. The law provides for a fine of up to $100,000 for individuals and imprisonment of not more than five years.
Tax Evasion Sentencing Guidelines
Tax evasion sentences are influenced by the amount of the tax avoided as well as the steps taken to do so and other factors. For example, if a corporation is found guilty of tax evasion the maximum fine is $500,000, not the $100,000 provided for individuals. Both individuals and corporations may be liable for the costs of prosecution.
Tax Evasion Statute of Limitations
Noncapital federal offenses have a five year statute of limitations, meaning that if information is not entered within five years and the defendant is not indicted within that time, the defendant cannot be prosecuted, brought to trial, or punished for the alleged offense. (See 18 USC §§3281-3301)
Tax Evasion Cases
Tax evasion is very typically associated with individuals who have amassed vast fortunes. The ability of these individuals to hire expensive tax lawyers helps contribute to an environment where aggressive tax avoidance can turn into tax evasion if appropriate steps are not taken. High profile tax evasion cases often involve television and sports celebrities.
- In 2013, “Beanie Babies” creator Ty Warner was required to pay a federal penalty of $53 million after being found responsible for federal tax evasion charges stemming from use of a Swiss bank account and failure to disclose income dating back to 2002 (Beanie Babies Creator Admits Guilt)
- Al Capone, one of the most notorious gangsters/murderers of all time, saw his decades-long criminal history and empire come to an end largely because of federal tax evasion charges that were brought against him and several key associates in 1931 (FBI: Famous Cases)
Quick Links & References
- An Overview of Federal Tax Evasion at the Cornell Legal Information Institute Online
- Sentencing Guidelines for “Evading or Defeating Tax” Set Forth in the U.S. Code
- Understanding the Difference Between Tax Negligence and Federal Tax Evasion
- Overview of Potential Penalties for Knowingly Engaging in Tax Evasion or Fraud
- Key Examples of Tax Evasion Prosecution Cases from the U.S. Department of Justice
- Title 26 of the Internal Revenue Code Defining Tax Evasion as a Federal Crime
Tax Evasion Laws By State
Tax evasion laws are designed to combat illegal practices where individuals or businesses intentionally avoid paying their due taxes. The specifics and penalties for tax evasion vary by state:
Under Code of Alabama Section 40-29-110:
- Tax evasion is a Class C felony, punishable by imprisonment for 1 to 10 years and fines up to $15,000.
Under Alaska Stat. Section 43.05.290:
- Tax evasion can lead to imprisonment for up to 5 years and fines up to $100,000.
Under A.R.S. Section 42-1127:
- Tax evasion is a Class 5 felony with penalties including imprisonment for 1 to 2.5 years and fines up to $150,000.
Under Ark. Code Ann. Section 26-18-201:
- Tax evasion is a Class D felony with penalties including imprisonment for up to 6 years and fines up to $10,000.
Under California Revenue and Taxation Code Section 19706:
- Tax evasion can result in imprisonment for up to 1 year and fines up to $20,000.
Under Colo. Rev. Stat. Section 39-21-118:
- Tax evasion is a felony with penalties including imprisonment for up to 3 years and fines up to $100,000.
Under Connecticut General Statutes Section 12-736:
- Tax evasion is a Class D felony with penalties including imprisonment for up to 5 years and fines up to $5,000.
Under Title 30, Section 573:
- Tax evasion is a Class E felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under Florida Statutes Section 213.24:
- Tax evasion can lead to imprisonment for up to 5 years and fines up to $5,000.
Under Georgia Code Section 48-1-6:
- Tax evasion can result in imprisonment for 1 to 5 years and fines up to $100,000.
Under Hawaii Revised Statutes Section 231-36:
- Tax evasion is a Class C felony with penalties including imprisonment for up to 3 years and fines up to $100,000.
Under Idaho Code Section 63-3045:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under Illinois Compiled Statutes 35 ILCS 735/3-7:
- Tax evasion is a Class 3 felony with penalties including imprisonment for 2 to 5 years and fines up to $25,000.
Under Indiana Code Section 6-8.1-10-4:
- Tax evasion is a Level 6 felony with penalties including imprisonment for 6 months to 2.5 years and fines up to $10,000.
Under Iowa Code Section 422.25:
- Tax evasion can lead to imprisonment for up to 5 years and fines up to $7,500.
Under Kansas Statutes Section 79-3615:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines up to $100,000.
Under Kentucky Revised Statutes Section 131.630:
- Tax evasion is a Class D felony with penalties including imprisonment for 1 to 5 years and fines up to $10,000.
Under Louisiana Revised Statutes Section 47:1642:
- Tax evasion can lead to imprisonment for up to 5 years and fines up to $10,000.
Under Maine Revised Statutes Title 36, Section 187-B:
- Tax evasion is a Class C crime with penalties including imprisonment for up to 5 years and fines up to $5,000.
Under Maryland Code Section 13-1002:
- Tax evasion can result in imprisonment for up to 5 years and fines up to $10,000.
Under Massachusetts General Laws Chapter 62C, Section 73:
- Tax evasion can lead to imprisonment for up to 5 years and fines up to $100,000.
Under Michigan Compiled Laws Section 205.27a:
- Tax evasion can result in imprisonment for up to 5 years and fines determined by the court.
Under Minnesota Statutes Section 289A.63:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under Mississippi Code Section 27-3-79:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under Missouri Revised Statutes Section 143.931:
- Tax evasion is a Class D felony with penalties including imprisonment for up to 4 years and fines up to $10,000.
Under Montana Code Annotated Section 15-1-216:
- Tax evasion is a felony with penalties including imprisonment for up to 10 years and fines up to $50,000.
Under Nebraska Revised Statutes Section 77-2713:
- Tax evasion is a Class IV felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under Nevada Revised Statutes Section 360.300:
- Tax evasion is a gross misdemeanor with penalties including imprisonment for up to 1 year and fines up to $10,000.
Under New Hampshire Revised Statutes Section 21-J:39:
- Tax evasion is a Class B felony with penalties including imprisonment for up to 7 years and fines up to $100,000.
Under New Jersey Statutes Section 54:52-8:
- Tax evasion is a third-degree crime with penalties including imprisonment for 3 to 5 years and fines up to $100,000.
Under New Mexico Statutes Section 7-1-72:
- Tax evasion is a fourth-degree felony with penalties including imprisonment for up to 18 months and fines up to $5,000.
Under New York Tax Law Section 1801:
- Tax evasion is a Class E felony with penalties including imprisonment for up to 4 years and fines up to $50,000.
Under North Carolina General Statutes Section 105-236:
- Tax evasion is a Class H felony with penalties including imprisonment for 4 to 25 months and fines up to $10,000.
Under North Dakota Century Code Section 57-39.2-17:
- Tax evasion is a Class C felony with penalties including imprisonment for up to 5 years and fines determined by the court.
Under Ohio Revised Code Section 5743.99:
- Tax evasion is a third-degree felony with penalties including imprisonment for 1 to 5 years and fines up to $10,000.
Under Oklahoma Statutes Section 68-240:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines determined by the court.
Under Oregon Revised Statutes Section 314.075:
- Tax evasion is a Class C felony with penalties including imprisonment for up to 5 years and fines up to $125,000.
Under Pennsylvania Consolidated Statutes Section 1268:
- Tax evasion is a third-degree felony with penalties including imprisonment for up to 7 years and fines up to $15,000.
Under Rhode Island General Laws Section 44-30-92:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under South Carolina Code Section 12-54-44:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under South Dakota Codified Laws Section 10-45-48:
- Tax evasion is a Class 6 felony with penalties including imprisonment for up to 2 years and fines up to $4,000.
Under Tennessee Code Annotated Section 67-1-1440:
- Tax evasion is a Class E felony with penalties including imprisonment for 1 to 6 years and fines up to $3,000.
Under Texas Tax Code Section 151.705:
- Tax evasion is a third-degree felony with penalties including imprisonment for 2 to 10 years and fines up to $10,000.
Under Utah Code Section 59-1-401:
- Tax evasion is a third-degree felony with penalties including imprisonment for up to 5 years and fines up to $5,000.
Under Vermont Statutes Title 32, Section 3205:
- Tax evasion can result in imprisonment for up to 1 year and fines up to $10,000.
Under Virginia Code Section 58.1-348:
- Tax evasion is a Class 6 felony with penalties including imprisonment for 1 to 5 years and fines up to $250,000.
Under Revised Code of Washington Section 82.32.290:
- Tax evasion is a Class C felony with penalties including imprisonment for up to 5 years and fines up to $10,000.
Under West Virginia Code Section 11-9-2:
- Tax evasion is a felony with penalties including imprisonment for 1 to 10 years and fines up to $10,000.
Under Wisconsin Statutes Section 71.83:
- Tax evasion is a Class H felony with penalties including imprisonment for up to 6 years and fines up to $10,000.
Under Wyoming Statutes Section 39-15-108:
- Tax evasion is a felony with penalties including imprisonment for up to 5 years and fines determined by the court.