A very common question that comes up in our tax legal defense work involves the term "tax evasion" and whether it is always considered a felony criminal offense.
The short answer is, yes, tax evasion is a felony, but things immediately get muddy in defining what tax evasion actually consists of. Just because a taxpayer makes a mistake or two on their tax return does not mean they have committed tax evasion.
In addition, since tax evasion is a crime, the US government must prove "beyond a reasonable doubt" that the taxpayer sought to willfully evade U.S. Tax.
What Does Tax Evasion Look Like?
Tax evasion is the concept of artificially reducing your tax liability in order to avoid having to pay tax (or full amount of tax) to the U.S. government.
There are various methods a person may use in order to artificially reduce their tax liability.
A Taxpayer may simply not report certain income they have received. Alternatively, they may under-report the income, or artificially increase expenses and deductions which do not exist, in order to bring down the tax liability.
Another common example is where a person may have a high-income W-2 job with not much in the way of deductions. In order to reduce their tax liability, the Taxpayer may claim to have a consulting or other business and include it on a Schedule C on their tax return.
Thereafter, the Taxpayer will take several deductions through their business that they could not otherwise take as an employee. That is because, for self-employed people, there are many legitimate business deductions available, which are not available to employees.
But since this is not a real business, and simply a "paper business" used to artificially reduce tax liability -- it is considered a form of tax evasion.
Tax Evasion as Defined by the IRS and the DOJ
Internal Revenue Code Section 7201 – Attempt to evade or defeat tax:
Any 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.
From the DOJ Criminal Tax Manual Regarding Tax Evasion:
“Tax evasion” is a shorthand phrase that many people use for all manner of tax fraud. But the charge of tax evasion, in violation of 26 U.S.C. § 7201, is not necessarily the best one to bring against individuals defrauding the IRS.
Defendants frequently seek to exploit the fact that, in order to establish the crime of tax evasion, the government must prove the existence of a tax due and owing and willfulness.
Prosecutors, therefore, should consider other charges, such as conspiring to defraud the United States, 18 U.S.C. § 371; filing false returns, 26 U.S.C. § 7206; or endeavoring to obstruct the IRS, 26 U.S.C. § 7212(a), as alternatives or supplements to the charge of tax evasion."
Some practitioners and courts may refer to section 7201 as “misdemeanor” tax evasion, but it is not technically tax evasion.
Compliance Extends Beyond the United States
Many U.S. corporations use offshore tax havens and other accounting gimmicks to avoid paying as much as $90 billion a year in federal income taxes. A large loophole at the heart of U.S. tax law enables corporations to avoid paying taxes on foreign profits until they are brought home. Known as “deferral,” it provides a huge incentive to keep profits offshore as long as possible. Many corporations choose never to bring the profits home and never pay U.S. taxes on them.
Deferral gives corporations enormous incentives to use accounting tricks to make it appear that profits earned here were generated in a tax haven. Profits are funneled through subsidiaries, often shell companies with few employees and little real business activity. Effectively, firms launder U.S. profits to avoid paying U.S. taxes.
Tax avoidance through offshore tax loopholes is a significant reason why corporations, which paid one-third of federal revenues 60 years ago, now pay one-tenth of federal revenues.
As long as the loopholes exist and deferral hasn't been eliminated, this is a very murky area to be involved with. Of course, the best advice is to stay compliant in ALL of your business dealings within and outside of the U.S. If you are out of compliance for international tax evasion (or potential evasion matters), you should speak with an experienced tax attorney before making any affirmative representations or statements to the IRS.
Remember, my Team and I are always here to help! If you think you may have a possible difficult tax situation or have any tax questions about the matters presented here, call me at 855-BEAT-IRS (855-232-5752), or email me at Larry@TaxProblemSolver.com and we can dive into your issues and solve them.
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