Tax evasion involves any illegal means to avoid paying taxes. Tax evasion generally involves a company or individual misrepresenting their income to the Internal Revenue Service (IRS). A charge of tax evasion has serious penalties, and understanding this crime can help to avoid any wrongdoing.
What is Tax Evasion?
When a corporation or individual misrepresents their income to the IRS, they may be charged with tax evasion. This could come from not reporting certain income, under reporting income, hiding money in offshore accounts, or over reporting deductions. Sometimes income is not reported by individuals because declaring the income could implicate an illegal source of money, and may act as an admission of guilt to other criminal charges.
(See also Money Laundering)
Who Prosecutes Tax Evasion Cases?
Tax evasion can be both a state and a federal crime. A number of federal agencies can be involved in investigating and prosecuting tax evasion cases. The IRS has Criminal Investigation special agents, the Justice Department has a Tax Division, and other federal investigators may cooperate in investigating and prosecuting tax evasion cases, including the Federal Bureau of Investigation (FBI).
States, including Massachusetts, can also prosecute tax evasion cases, with participation and investigation by federal, state and local law enforcement.
What are the Penalties for Tax Evasion?
Under federal law, individuals can face fines, costs, and possible prison time if they are convicted for tax fraud. Under Section 7201 of the Internal Revenue Code, a person who willfully attempts to evade or defeat any tax could face fines of up to $100,000 for an individual, or $500,000 for a corporation; payment of prosecution costs; and imprisonment of up to five years.
State penalties vary by state, and can also vary by degree. In Massachusetts, willful evasion could result in penalties similar to the federal penalties above, although misdemeanor penalties are lower.
What Types of Activity are Targeted by the IRS for Tax Evasion?
A number of small business and sole proprietorships may face investigation by tax authorities for tax evasion. Because of their smaller size and scale, it may be easier for some individuals to under report income without the government knowing about all the transactions. Some smaller business may try and hide transactions by failing to record cash receipts, tips, or barter transactions, and then willfully failing to report the income to tax authorities.
Other times, suspected criminals are prosecuted for tax evasion, even where there may be insufficient evidence against them to support the underlying criminal prosecution. Most famously, Al Capone was eventually prosecuted for tax evasion, rather than the number of other crimes the government suspected him of committing.
How to Avoid Tax Evasion Investigation or Prosecution?
Many people may not consider reporting small amounts of money as any big deal, but the IRS may disagree. Even wait staff under reporting tips is considered a form of tax evasion. Another more common way people engage in tax evasion is by overstating charitable contributions, including church donations.
Another source of tax evasion investigation involves individuals putting their money in foreign tax havens to illegally avoid paying taxes. Additionally, helping someone else to commit tax evasion by signing false documents or lying to investigators could result in criminal charges.
Who Reports Tax Evasion Suspicions?
Law enforcement investigations can uncover illegal sources of money, unreported as taxable income. Additionally, banks or financial institutions may report suspicious financial activity that could red-flag a tax evasion investigation.
Some people may report illegal tax activity in order to get a cash reward. The IRS has a whistleblower program which rewards individuals who report tax evasion up to 30 percent of the amount collected.
What to do When You Learn of an IRS Investigation
Tax evasion is a very serious crime, and can result in severe penalties. According to the IRS, since the Criminal Investigation division's inception in 1919, their conviction rate for Federal tax prosecution has never fallen below 90 percent.
If you become the target of a tax evasion investigation, you may not know how to respond. Once you become aware of an investigation, legal counsel can help to make the difficult decisions of what the next step should be.
The question of cooperation with the government is a critical decision. Often times, individuals are given the opportunity to cooperate with investigators to reduce potential penalties. This decision is not one to be taken lightly, and could affect an eventual resolution or could expose the individual to criminal and civil liability.
Defending Charges of Tax Evasion
Defenses to a charge of tax evasion could include showing any under reporting of taxes was not willful. Other defenses might include good faith reliance on an accountant, arguing the prosecution is outside the statute of limitations, or that there is insufficient evidence to support a conviction.
However, with the laws and agencies involved in tax fraud investigations, the legal issues involved can be complicated. Additionally, because of the penalties involved, each decision carries significant consequences. An experienced attorney focused in this area will be able to clarify the issues facing a client investigated by a state or federal agency for tax evasion, can help identify the elements required to prosecute, and defend their client.