Tax evasion is a serious federal crime that carries severe punishment. You may be subject to fines, restitution, and time in federal prison if convicted. This page explains the tax evasion definition, meaning, penalties, and examples. Learn more about how a tax evasion defense attorney can defend you against these federal criminal cases and charges.
The Zoukis Consulting Group’s partner tax fraud attorneys take pride in defending clients facing a range of federal criminal charges, including tax evasion. Christopher Zoukis makes every effort to ensure that his clients remain informed throughout their federal tax evasion cases.
Table of contents
- What is Tax Evasion?
- Tax Evasion Types
- Tax Evasion Examples
- Tax Evasion Elements
- Federal Tax Evasion Statute – 26 U.S.C. § 7201
- Tax Evasion Jail Time
- Legal Defenses to Tax Evasion
- Who Investigates Tax Evasion?
- Who Prosecutes Tax Evasion?
- Infamous Criminal Tax Cases
- Your Federal Tax Evasion Experts
What is Tax Evasion?
Tax evasion is the concealment of assets to avoid paying taxes. Tax evasion happens when someone tries to avoid being assessed or paying taxes.
Put another way, tax evasion is a form of illegal behavior in which a person or firm attempts to avoid paying their tax debt. Not reporting cash transactions, hiding or falsifying revenue, and not declaring currency transactions are all examples of tax evasion. Criminal charges and cases and stiff penalties apply to tax evasion.
For example, if someone transfers assets to prevent the IRS from determining their precise tax liability, this constitutes an attempt to avoid assessment. However, if assets are hidden after a tax obligation has accrued and remained unpaid, this is an effort to avoid payment.
If you are charged with this federal crime, you need an experienced tax evasion defense attorney on your side. Your lawyer can explain tax evasion’s definition, meaning, and potential penalties.
Tax Evasion Definition
Tax evasion is attempting to avoid paying a legitimate tax obligation by hiding cash, property, or profits. Individuals caught evading taxes are frequently subjected to criminal penalties and fines. Failing to pay taxes is classified as a federal crime under the IRS’s tax code.
Tax Evasion Meaning
Tax evasion refers to the illegal nonpayment and the illegal underpayment of taxes. Even if a taxpayer fails to submit required tax forms, the IRS may determine whether taxes were owed based on information supplied by third parties, such as W-2 information from an employer or 1099. A person is not guilty of tax evasion until it is shown that they intentionally failed to pay.
Failure to pay required taxes might lead to federal criminal tax evasion cases. Federal prosecutors must show that the taxpayer’s tax dodging was a deliberate action before criminal charges may be filed. While a person may be fined for any taxes that have not been paid, they also face official penalties and possible federal prison.
According to the IRS, tax evasion penalties include:
- Imprisonment of no more than five years
- A fine of no more than $250,000 for individuals or $500,000 for businesses, or both
- Prosecution costs
Tax Evasion Types
The IRS categorizes tax evasion into two categories: assessment and payment evasion. A person who attempts to avoid being assessed has committed fraud by transferring assets. If a taxpayer hides their money after a tax is due and owing, it’s an attempt to defraud the government.
Assessment evasion occurs when a taxpayer engages in an illegal action to lower their tax bill. It is considerably more stringent than proving negligence. An intentional underreporting qualifies as an attempt to avoid taxes.
Payment evasions are illegal acts to avoid payment. This generally entails hiding money or assets for which tax must be paid. Such behavior might also include removing assets from the IRS’ reach, for example, by withdrawing funds from a foreign bank account.
Simply not paying taxes owed is not an evasion of payment. Concealing assets in a family member’s bank account is an example of evasion of payment.
Tax Evasion Examples
A finding of tax evasion is only made if there are errors in the return or if delinquent taxes are due. The IRS code specifies that someone who has a tax debt is guilty only if they take an active measure to dodge paying taxes. Furthermore, the defendant must intentionally commit the unlawful act.
Tax evasion does not require complex plans or clandestine meetings. Below are several examples of how this crime is accomplished, which is simpler than many imagine.
Speak with a federal tax evasion defense attorney if you have questions about its definition, meaning, sentence, penalties, or potential defenses.
Tax liability is dependent on reportable income figures, so if someone falsifies them, their taxes will be lower. It’s alluring but also a federal crime.
Another way to underreport income is through structuring. Structuring lowers deposit, withdrawal, and transfer amounts below bank reporting requirements.
It’s a crime because it aims to avoid the discovery of actual earnings. Since it’s intended to keep you hidden from the IRS, it’s a felony. Since the Foreign Account Tax Compliance Act (FATCA) went into effect, the IRS relentlessly pursues cases like this.
Individuals may falsify their tax records in various ways, one of which is by lying to their CPA. The accountant usually sends the customer a questionnaire to complete.
It provides the accountant with all the figures they need for the tax return. Clients have an idea and decide to lie. Perhaps an offshore account is rejected or otherwise not disclosed. There’s no end to it.
Illegal Work Deductions
Don’t overlook your non-reimbursable business expenses. The IRS allows workers to claim charges that are “ordinary and appropriate” in their line of work. Reimbursed mileage and tools are examples of such items.
This is a simple trap because assets, such as cars and computers, are frequently used for business and personal purposes. When electing such deductions, ensure to only claim legitimate business expenses.
The IRS often cannot find money hidden from plain sight. However, because offshore accounts generate interest, it is a useful dodge for individuals who don’t want to pay taxes. Interest may mount up rather quickly if someone has millions of dollars stashed away in foreign banks. The FATCA was created to challenge this eventuality.
Due to the complexities of hiding interest, you should speak to a federal tax evasion defense attorney to better understand your options. Your attorney may be able to argue that your conduct does not fit the definition of tax evasion or otherwise reduce your sentence or penalties.
Tax Evasion Elements
Tax evasion provisions found in 26 U.S.C. § 7201 outline the three offense definition elements:
- Owing unpaid taxes
- Attempting to evade or avoid paying owed taxes
- Deliberately failing to pay the owed taxes
In addition, the government must present evidence of each of the above elements beyond a reasonable doubt. This is the only way to secure a federal conviction.
Federal Tax Evasion Statute – 26 U.S.C. § 7201
The federal tax evasion statute is contained in 26 U.S.C. § 7201. This statute prohibits a person from “willfully” attempting to evade, defeat, or otherwise not pay taxes.
The government must establish that the defendant had an unpaid federal tax amount owing, they took deliberate action to avoid paying the correct tax amount, and did so with knowledge and intent. Tax evasion can result in a fine of up to $100,000 or imprisonment for five years.
Tax Evasion Jail Time
The IRS considers any intentional effort to avoid or defeat taxes tax evasion. Conviction may result in a felony conviction and stiff penalties, including:
- Imprisonment: Defendants convicted of tax evasion can be sentenced to five years in federal prison.
- Monetary penalties: Convictions can lead to fines of up to $250,000 for individuals and $500,000 for businesses.
There are only two tax evasion penalties that may result from these federal criminal law violations. Other collateral consequences may also apply, such as:
- Loss of state or federal licensure
- Restitution to the federal government
- Loss of employment and future employment prospects
- A misdemeanor or felony record
Legal Defenses to Tax Evasion
Tax evasion is a federal crime, but several defenses are available. Some of these defenses are comparable to those for other federal charges. For example, common tax evasion defenses include:
Statute of Limitations
If the government decides to bring criminal cases for tax evasion, they have limited time to do so. Criminal charges are generally filed within six tax years of the incident, depending on the type of crime alleged.
The IRS has many rules and regulations regarding personal income taxes. The IRS generally does not pursue collection action after ten years from the assessment date. Stated plainly: defendants are not criminally charged if they filed a return ten years ago but never paid the associated fees, as long as they comply with filing responsibilities.
There is a significant difference between tax evasion and the “mistake” defense. If a person makes an error on their taxes or what must be reported, they may raise a mistake defense. However, simply stating that they were unaware they had to submit taxes will not suffice. This is a fine line to walk, and a tax evasion defense attorney must clarify which blunders were made.
Entrapment is when the government induces an innocent person to commit a crime they would not have otherwise engaged in. However, merely providing a chance to do so is not entrapment.
If you believe you were entrapped to evade taxes, consult immediately with a tax evasion attorney. Your attorney may be able to argue that due to government misconduct, you did not fulfill the definition of tax evasion.
The government must typically show that a defendant acted with the deliberate intention of not paying taxes to be convicted of tax evasion. For example, if you can show that your failure to file a tax return was due to forgetfulness, this may be sufficient evidence to dismiss a tax evasion charge because of a lack of proof.
Another option is to dispute the IRS’s calculations and claim that they have made an error. For example, if the charged tax evasion conduct is erroneous, this can impact the penalty.
Who Investigates Tax Evasion?
Different branches of the Internal Revenue Service are responsible for tax crimes. The Criminal Investigation Division of the IRS is primarily responsible for conducting criminal inquiries into infractions of the Internal Revenue Code and various money laundering laws.
When IRS agents, also known as auditors, identify fraud, they commence an investigation independently. They may receive tips from the general public and other law enforcement agencies throughout the country. Tips from victims or witnesses with knowledge of the crime are also considered. For example, those attempting to conceal their identity by misusing Bitcoin or other digital currency platforms may raise red flags with online platforms.
The IRS performs significant work before a target knows about the tax evasion case investigation. The IRS is not required to notify the suspect of their criminal investigation.
The agent gathers all relevant information and evidence to support their claim during the internal investigation. This can include:
- Subpoenaing Bank Records
- Executing Search Warrants
- Conducting Surveillance
- Interviewing Witnesses
This case may be dropped or further investigated based on the outcome of this inquiry. The IRS conducts over 3,000 investigations each year and prosecutes about just under that number, demonstrating how seriously they take tax evasion cases.
Immediately contact a federal tax evasion defense attorney as soon as you know of the investigation. Your lawyer may be able to argue that your conduct does not fulfill tax evasion’s case definition or that the sentence or penalty should be reduced.
Who Prosecutes Tax Evasion?
Federal prosecutions for criminal tax investigations are authorized by the Department of Justice’s Criminal Tax Division in Washington, D.C. This applies to any criminal tax inquiry, regardless of where it was initiated. A person under IRS criminal investigation can participate in meetings with both IRS and DOJ officials to assess whether or not criminal charges should be filed and whether the definition of tax evasion has been met.
A conference with the U.S. Attorney or an Assistant U.S. Attorney is also available if the case is referred to the Criminal Tax Division for prosecution. Evidence may be offered at this meeting to persuade the government not to pursue tax evasion cases.
Unless requested by a tax evasion defense attorney, none of these conferences are accessible. Your federal criminal defense attorney may advise you to either participate or not participate, depending on their strategic approach to your case. Likewise, your tax evasion attorney may argue that your conduct does not fulfill the crime’s definition or that reduced penalties should be imposed for the case.
Infamous Criminal Tax Cases
Avoiding taxes and income tax evasion are distinct activities. When a person or company employs unlawful tactics to avoid paying taxes, they engage in tax evasion, resulting in case prosecution. On the other hand, tax avoidance entails legal methods to lower one’s tax burden.
Deceptive or fraudulent methods to cut costs on taxes, on the other hand, might result in hefty fines and even jail time. Even though only a tiny percentage of returns are audited each year, the penalties aren’t worth it. Prominent tax evasion cases illustrate the potentially severe punishment for this federal crime.
Famous tax dodgers have illegally avoided paying their fair share. Discover how much they owed and how they were discovered below.
Telecom Executive Walter Anderson
Business tycoon Walter Anderson made millions after the AT&T breakup. He was sentenced to nine years in prison for the most significant tax evasion scheme in U.S. history, in which he evaded more than $200 million in taxes.
The government claimed that in 1998, Mr. Anderson paid $495 in taxes on $67,939 of earnings. The IRS alleged that he earned at least $126 million that year by hiding income through offshore corporations and concealing assets from law enforcement officials.
Martha Stewart was convicted of lying to federal investigators. Stewart stated that she had struck a deal with pharmaceutical firm ImClone Systems in which she would sell her shares of stock at a specific price (i.e., $60) if the price ever dropped below that level. In reality, she had no such agreement and sold 4,000 shares of ImClone stock for $228,000 before the firm announced the FDA did not approve its promising anti-cancer drug.
Was it, in fact, insider trading? The government couldn’t establish that. However, they did determine that Stewart lied during the inquiry. After serving 18 months at FPC Alderson and undergoing a thorough rebuilding of her reputation, Stewart’s $220,000 back-tax debt appears like a parking ticket.
Gangster Al Capone
Al Capone’s name has been linked with various illicit activities, including bootlegging, prostitution, and murder. Even so, only one unlawful activity resulted in Al Capone’s imprisonment: income tax evasion. The Chicago Outfit earned estimated annual revenues of $100 million during Capone’s reign as boss.
Even money earned through illegal activities is subject to tax. This federal law revision placed criminals such as Capone in a difficult position, forcing them to choose between admitting to breaking the law and paying taxes or cheating on taxes and risking imprisonment for evasion. In addition to paying fines and outstanding taxes, Capone received 11 years in prison.
Country Star Willie Nelson
It’s impossible to know what made Willie Nelson more renowned, his 1950s songs or his decades-long battle with the IRS. In the late 1990s, federal agents took nearly all of Nelson’s belongings and claimed a $32 million tax debt. It’s thought that poor advice from his accountant, who put money in fraudulent tax shelters, was to blame for his financial difficulties.
The IRS ultimately settled with Nelson. And he recorded “The IRS Tapes: Who’ll Buy My Memories?” That album was part of Nelson’s tax bill settlement. Only $3.6 million from the album’s sales were collected by the IRS, but Nelson’s career flourished, and he was able to pay off his debt.
Girls Gone Wild’s Joe Frances
It should come as no surprise that Joe Frances was already a polarizing figure before he ran into trouble with the taxman. He is the creator of the “Girls Gone Wild” franchise, which has many supporters and detractors. It’s perhaps no surprise, then, that when allegations of tax fraud started to surface around him, there was a lot of interest in his character.
Setting all of that aside, he has already paid back more than $20 million in false deductions after settling two tax fraud cases in 2007. He was required to return a certain amount of money as part of the agreement.
In addition to his IRS difficulties, Joe Frances has been the target of several lawsuits and legal issues. He served jail time for some of these tax evasion cases and had to compensate victims. It appears that troubles and attention are awaiting him wherever he goes.
Movie Star Nicolas Cage
In 2007, Nicolas Cage was fined $600,000 for illegally deducting personal expenditures. This is why spending money on office supplies and using them as business deductions is dangerous.
In 2009, it got a lot worse when the IRS hit Cage with $6.2 million in back taxes for failing to pay taxes on $24 million in income from the films “Ghost Rider” and “Grindhouse.” This came about because he filed a false tax return.
In his defense, Cage did the legal equivalent of a grin, a shrug, and an apology for his accountants’ blunders, of which he was unaware. It was reported that Cage accused his business manager of malfeasance. He claimed his manager stole millions of dollars while hanging Cage out to dry.
Cage lost a Bavarian castle and properties in Las Vegas, California, and New Orleans due to his tax problems.
Blade Star Wesley Snipes
Many charges have been brought against the Wesley Snipes by the Department of Justice. Snipes was accused of failing to file federal income tax returns for several years and hiding money in foreign accounts. The actor’s estimated federal tax debt was around $12 million.
In 2008, a jury found Snipes not guilty of felony tax fraud and conspiracy charges but guilty of misdemeanor counts. Snipes received three years in prison.
Douglas P. Rosile and Eddie Ray Kahm were charged as co-conspirators. Rosalie was Snipe’s accountant, who served ten years in prison. Kahn, a tax protester, received four-and-a-half years in prison.
Queen of Mean Leona Helmsley
In 1989, businesswoman and real estate magnate Leona Helmsley was convicted of $1.2 million in taxes evasion. She was fined $7.1 million above and beyond the $1.7 million owed in back taxes.
After conviction, Helmsley served 18 months in federal prison and one month in a halfway house. She spent two months in home confinement during her trial.
Many of Helmsley’s dissatisfied hotel employees testified against her at trial. One former housekeeper stated that Helmsley had said, “We don’t pay taxes. Only the little people pay taxes.” This case highlights the importance of paying the correct amount of taxes.
Your Federal Tax Evasion Experts
Please get in touch with our team if you or a family member are under investigation or are facing tax evasion cases.
Our partner federal tax evasion defense attorneys are available to assist you in obtaining the best possible outcome by utilizing their experience and expertise in federal court. This includes whether or not to plead guilty to this white-collar crime.
Our team will safeguard your rights while working toward a favorable conclusion that reduces the chances of lengthy custody time.
Published Feb 16, 2022 by Christopher Zoukis, JD, MBA | Last Updated by Christopher Zoukis, JD, MBA on Aug 1, 2022 at 1:03 pm