Loading the player...

What is 'Tax Evasion'

Tax evasion is an illegal action in which a person or entity deliberately avoids paying a true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code.

BREAKING DOWN 'Tax Evasion'

Tax evasion applies to both the illegal nonpayment as well as the illegal underpayment of taxes. Even if a taxpayer fails to submit appropriate tax forms, the IRS can still determine if taxes were owed based on the information required to be sent in by third parties, such as W-2 information from a person’s employer or 1099s. Generally, a person is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional.

Determining Intent to Evade Taxes

When determining if the act of failure to pay was intentional, a variety of factors are considered. Most commonly, a taxpayer’s financial situation will be examined in an effort to confirm if the nonpayment was the result of committing fraud or of the concealment of reportable income.

A failure to pay may be judged fraudulent in cases where a taxpayer made efforts to conceal assets by associating them with a person other than themselves. This can include reporting income under a false name and Social Security number (SSN), which can also constitute identity theft. A person may be judged as concealing income for failure to report work that did not follow traditional payment recording methods. This can include acceptance of a cash payment for goods or services rendered without reporting them properly to the IRS during a tax filing.

In most cases of corporate tax evasion listed on the IRS website, the tax liability was underrepresented. Many business owners undervalued the sums of their receipts to the agency, an act which was deemed to be the purposeful evasion of tax. These were documented to be sources of income, revenue and profits that were not accurately reported. 

Tax Evasion Versus Avoidance

While tax evasion requires the use of illegal methods to avoid paying proper taxes, tax avoidance uses legal means to lower the obligations of a taxpayer. This can include efforts such as charitable giving to an approved entity or the investment of income into tax deferred mechanism, such as an individual retirement account (IRA). In the case of an IRA, taxes on the invested funds are not paid until the funds, and any applicable interest payments, have been withdrawn.

Criminal Charges for Tax Evasion

Failure to pay proper taxes can lead to criminal charges. In order for charges to be levied, it must be determined that the avoidance of taxes was a willful act on the part of the taxpayer. Not only can a person be liable for payment of any taxes that have been left unpaid, they can also be found guilty of official charges and may be required to serve jail time. According to the IRS, the penalties are: 

  • Jail time of no more than five years
  • A fine of no more than $250,000 for individuals or $500,000 for corporations
  • Or both, along with the costs of prosecution
RELATED TERMS
  1. Tax Avoidance

    Tax avoidance is the use of legal methods to modify an individual's ...
  2. Tax Fraud

    Tax fraud occurs when an individual or business entity willfully ...
  3. Tax Shelter

    A tax shelter is a vehicle used by taxpayers to minimize or decrease ...
  4. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
  5. Tax Year

    Tax year refers to the 12-month period covered by a taxpayer's ...
  6. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
Related Articles
  1. Taxes

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  2. Taxes

    Tax Evasion Plagues Greece

    Contrary to what some may think, Greece’s debt problems are not due to extravagant spending by the government, but to insufficient revenues caused by rampant tax evasion estimated at 20 billion ...
  3. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  4. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  5. Taxes

    Is it Smart to Avoid Paying Federal Income Tax?

    Not paying federal income taxes might sound appealing, but is it really a good idea?
  6. Taxes

    Why Do So Many People Fall Behind On Their Taxes?

    Despite the threat of owing thousands of dollars to possibly the most feared organization in the U.S., millions of Americans continue to fall behind on their taxes.
  7. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  8. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  9. Taxes

    Reducing Your Tax Burden in Retirement

    Implementing tax diversification in a retirement portfolio can lead to more money in your pocket.
  10. Taxes

    Is Multinational Tax Avoidance at an End?

    Are governments doing enough to end corporate tax avoidance?
RELATED FAQS
  1. How Does The Marginal Tax Rate System Work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. Learn how the marginal ... Read Answer >>
  2. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
Trading Center