Tax Crimes & Tax Evasion 

Tax evasion is when an individual, company, trust or organization attempts to avoid paying taxes by employing illegal schemes.

By far the most common form of tax evasion is failing to report, or underreporting income. However, tax evasion can cover a wide range of fraudulent tax practices such as:

■Sales Tax Evasion
■Over reporting dependents
■Tax settlement scams
■Transferring assets
■Illegal income
■Foreign accounts
■Employee excise tax fraud
■Bankruptcy fraud

Even if you pay a portion of the due taxes, you can be charged with a tax crime. Tax evasion is a felony, regardless of how much or how little is owed to the government.

Tax Avoidance

It’s important to note the difference between tax evasion and tax avoidance. Tax avoidance is the legal but strategic maneuvering of one’s affairs in an attempt to pay little or no taxes

Tax evasion on the other hand, is using illegal means to disregard a tax liability. As evidenced above, evasion schemes such as underreporting and failing to file, are all illegal tactics employed to circumvent tax laws.

One example of legal tax avoidance is making a charitable donation.  Donating to charities is counted as a deduction, thus legally lowering one’s tax liability.  Other tax avoidance examples include contributing to employer sponsored retirement plans or moving their assets to a “tax haven”, such as a country with no income tax.  However, both of these legal mechanisms can be abused.  Overstating charitable donations or using abusive tax shelters for example, is considered tax evasion and not tax avoidance.

The Crime of Tax Evasion

Tax evasion is a federal crime and is covered under 26 U.S.C.A. § 7201. While state taxes and state laws vary, most have very similar laws regarding the crime of tax evasion. Even the basic elements for both federal tax evasion and state tax evasion are nearly identical:

1. The taxpayer willfully failed to file and;
2. Committed an affirmative act to evade the tax;
3. And a tax deficiency actually exists.

In order for someone to be convicted on charges of tax evasion– whether it is in state or federal court– all three of these charges must be proven beyond a reasonable doubt.

Defenses to Charges of Tax Evasion

From the required elements specified above, some possible defenses exist.

First, accidental tax evasion is not a crime and a person cannot be prosecuted for tax evasion if the individual did not purposely and willingly act to avoid taxes.

Secondly, even if a person willingly and intentionally makes an affirmative act to avoid or conceal taxes or income, a person cannot be convicted for tax evasion if no deficiency actually exists between what was paid and what is owed.

It’s important to note that while an individual cannot be charged with tax evasion if no tax discrepancy exists, it may still be possible to be charged with other related crimes, such as filing false returns.

If at any time, you feel unsure about whether your filing methods are within IRS’s tax return guidelines, contact the tax attorneys at The Blanch Law Firm immediately.

Penalties and Prosecution for Tax Evasion

Tax evasion is a felony and punishable in federal court with up to $100,000 in fines and up to five years in prison. Corporations are subject to up to a $500,000 fine, as well as imprisonment for certain individuals involved in the evasion.

Anyone who is convicted of tax evasion is also subject to paying court costs for prosecution. State tax evasion cases carry similar penalties, but vary slightly from state to state.

Since everyone is required to file taxes each year, multiple years of tax evasion are prosecuted as individual counts. Therefore, a tax scheme that is repeated year after year, counts as a different charge for each one of those years.

Another interesting element of tax evasion prosecution is that proceeds from illegal activity are also subject to federal taxes. Even if the money is acquired through illegal means, an individual is still required to report this illegal income on all income tax returns.

In 1976, the Supreme Court case of Garner v. United States ruled that a declaration of illegal income does not violate a person’s Constitutional right to remain silent.  For example, the famous gangster Al Capone was convicted on charges of tax evasion for not reporting his illegally obtained income even though he could not be convicted on other charges.

The Internal Revenue Service, like other state agencies is able to calculate unreported and illegal income through differences between net worth, which can be calculated through tax returns, and actual expenditures. If someone spends and acquires capital beyond what that individual’s net worth could allow, an obvious discrepancy exists.

Prosecutors are aided in tax evasion cases through what are known as whistle-blower programs. These programs are incentive-laden, allowing the whistle-blower to receive between 15-30% of the money the government is able to recover from a successful tax evasion case prosecution. This incentive applies if the government is able to recover a minimum of $2 million.

Tax Evasion Totals and Current News

In 2005, the Internal Revenue Service estimated that nearly 20% of income went unreported, costing the IRS more than $350 billion. In 2011, that sum was estimated to be close to $500 billion. With budget cuts increasing, the debt ceiling being raised, and as the United States continues to build its debt, unpaid taxes have a great effect on U.S. policy and the economy.

A recent piece of legislation to help curb tax evasion in the United States is Foreign Account Tax Compliance Act of 2010. In conjunction with countries like Switzerland, its goal is to require foreign banks to disclose the balances, withdrawals and transactions of foreign bank accounts held by American citizens. It also forces the account holders to be subject to taxes on any income derived from those accounts.

The Foreign Account Tax Compliance Act also reports those foreign accounts to the IRS on new IRS forms and enforces penalties if any underreporting of foreign income exists.

This Act has caused a lot of controversy because many foreign banks are no longer accepting American consumers and are closing American accounts because of the extensive nature of this regulation. While this may have a negative effect on many American citizens, namely those living abroad or those with dual citizenship, the Act will have positive effects in the area of tax evasion because people will be forced to keep their money within the United States out of necessity—and this allows for easier monitoring by the IRS. The Act will also bring in hundreds of millions of dollars each year to the U.S. Treasury.