What is Tax Evasion? Laws, Charges & Statute of Limitations

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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)

Tax Evasion Quick Links & References

Tax Evasion Laws by State

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming