Is Tax Evasion A Felony?
Tax evasion is a criminal offense, so people who believe they may have committed a tax crime often wonder about the severity of this violation. From the perspective of the IRS, if a person willfully or intentionally evades paying taxes, they are trying to steal money from the IRS as they artificially reduce their tax liability.
It is important that taxpayers have a basic awareness of how tax law works, common tax crimes, and some common consequences of tax evasion charges, such as significant penalties and jail time.
TABLE OF CONTENTS
- Tax evasion is a felony under IRC 7201 that can result in 5 to 30 years in prison and $5,000 to $10,000 in fines.
- Tax evasion involves a taxpayer owing debt, the taxpayer attempting to evade or defeat the tax, and the taxpayer being wilful in their attempt to evade the tax.
- If a situation is truly considered tax evasion under IRC 7201, then the action is considered a felony. While a tax fraud situation may be similar to tax evasion, the definition of the IRC 7203 misdemeanor does not specifically use the words ‘tax evasion,’ so therefore, it is not truly considered tax evasion.
- The IRS can usually audit a tax return up to three years after filing. If the IRS discovers that more than a quarter of the taxpayer’s income was omitted from their federal tax return, the federal tax fraud statute of limitations grows to six years.
Is Tax Evasion A Felony?
Yes, tax evasion is a felony that can result in 5 to 30 years in prison and $5,000 to $10,000 in fines. However, it is important to realize that the definition of ‘evasion’ plays a significant role in the severity of the criminal offense, and therefore, the related consequences.
The tax evasion statute that can be found at 26 U.S.C. § 7201, outlines the three elements of a crime:
1. The taxpayer owing tax debt
2. The taxpayer attempting to evade or defeat the tax
3. The taxpayer was wilful in this action.
'Tax Evasion' Definition
Tax evasion is the wilful and illegal unpayment or underpayment of the local, state, and federal tax liabilities that are owed to the government. It is illegal to evade tax payments, so if a taxpayer or business is caught doing so, they may face punishment such as a financial penalty or even serve a prison sentence.
Tax evasion is a crime that is outlined under Internal Revenue Code section IRC 7201, which has the following definition:
“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.”
To summarize, tax evasion must be:
- Intentional or willful
- Evading or avoiding the payment of tax that is legally owed
In the context of the crime of tax evasion, the willfulness of a person to avoid their tax payment plays a significant role in the outcome of the violation. In a criminal situation, ‘wilful’ means intentional or on purpose.
It is important to note that ‘wilful’ has a different meaning in the civil courts context, such as wilful blindness or reckless disregard.
Is Tax Evasion A Felony Or Misdemeanor?
If a situation is truly considered tax evasion under IRC 7201, then the action is considered a felony. The confusion is usually introduced because some attorneys refer to a section 7203 violation as a misdemeanor tax evasion. However, this violation does not truly represent tax evasion as it is defined. Even though 7201 and 7203 violations are similarly defined, the internal revenue code does not utilize the specific term ‘tax evasion’ when describing a 7203 misdemeanor.
The term ‘tax evasion’ has become a conversational term that people use when discussing a general tax violation or tax fraud situation, which has led to confusion about whether tax evasion is a felony or a misdemeanor. It is important to remember that in a criminal court context, tax evasion has an explicit definition. Any other type of tax violation that is not explicitly categorized as tax evasion may fall under IRC 7203 instead of IRC 7201.
IRC 7203 Misdemeanor
While similar to tax evasion, the definition of the IRC 7203 misdemeanor does not specifically use the words ‘tax evasion:’
“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.”
Even though IRC 7203 mentions the willful attempt to evade paying taxes, the lack of the term ‘tax evasion’ is what distinguishes the two.
What Qualifies As Tax Evasion?
A variety of factors are considered when the IRS is determining if the failure to pay a tax bill on time was due to a mistake or an illegal evasion of tax payment. In this situation, the IRS will usually investigate the accounts of the individual to determine if they have committed tax fraud or concealed any of their reportable income.
A tax unpayment or underpayment may be judged as fraudulent if the person intentionally tried to conceal their assets by associating them with another person. This asset concealment could have taken place by the taxpayer reporting income under a fake name and Social Security Number, which can be considered identity theft as well as tax evasion. If a person failed to report work or income that did not follow a traditional payment recording method, this concealment may also be considered wilful tax evasion. Accepting a cash payment for goods or services rendered and failing to report this information on their income tax return is an example of this form of tax evasion.
Tax Evasion Vs. Tax Avoidance
A tax violation is considered tax evasion in the case that illegal methods were used to avoid paying the true tax liability. On the other hand, tax avoidance utilizes legal methods to lower the tax bill. Examples of legal tax avoidance include charitable donations or retirement account investments like a Roth IRA or 401k.
Statute of Limitations Tax Evasion
The IRS can usually audit a tax return up to three years after filing. If the IRS discovers that more than a quarter of the taxpayer’s income was omitted from their federal tax return, the federal tax fraud statute of limitations grows to six years.
Ensuring your businesses or corporations are in compliance with the United States tax laws is essential for avoiding penalties and potentially facing a prison sentence. If you are facing a charge, a tax lawyer will be a valuable person to provide assistance. Schedule a consultation with a licensed tax attorney at Ideal Tax if you need help understanding the tax code or advice about how to resolve your tax situation.