What Is Tax Evasion?
Tax evasion is a felony under the laws of almost every jurisdiction in the world because it is considered a threat to the government's ability to fund its own operations. Tax evasion can carry both civil and criminal penalties, which can be dangerous because tax rules can be quite complex and innocent mistakes can be costly for taxpayers. Fortunately, in the U.S., criminal intent must be shown in order to convict a defendant of tax evasion. This article provides a general overview of the subject from the perspective of U.S. federal law.
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Distinction Between Tax Evasion and Tax Avoidance
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Tax evasion is the use of illegal means to avoid or reduce the payment of taxes legitimately owed, while tax avoidance is the use of legal means (finding loopholes or tax shelters, for example) to accomplish the same goal. Since the line between the two is sometimes not well-defined, some forms of tax avoidance are dangerous because they may be construed as tax evasion by some authorities.
Misrepresentation Versus Concealment
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Avoiding the payment of taxes through misrepresentation can be done in two ways: presenting false information and presenting true facts selectively, so as to leave a misleading impression that underestimates actual tax liability. Concealment occurs when someone hides assets or income or destroys financial records and can result in prosecution, even if the person concealing the assets or income has not yet filed a misleading tax return (prosecution commences before the filing deadline, for example).
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Common Forms of Tax Evasion
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Tax evasion through concealment is nearly universal in illegal industries such as drug trafficking, where complying with tax law by admitting income from illegal sources would result in admitting guilt to another, more serious crime. Avoidance of import duties by misrepresenting the nature or value of an imported product is also particularly common.
Failure to File a Tax Return
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Failure to file a tax return can subject a taxpayer to civil penalties of up to 25 percent of the tax due. Willful failure to file a tax return can subject a taxpayer to one year in prison for every year in which a return is not filed (subject to a six-year statute of limitations).
Legal Standards
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In order to violate U.S. federal criminal prohibitions against tax evasion, a person must have: an unpaid tax liability; perform an act that evades or attempts to evade either assessment or payment of the tax: and specifically intend to violate a known tax obligation (negligence cannot result in liability for tax evasion but can give rise to civil liability). Individuals can be prosecuted for avoiding paying their own taxes or for causing a corporation to avoid paying its taxes.
Penalties
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In the U.S., tax evasion is punishable by a fine of up to $100,000 ($500,000 for corporations) and/or imprisonment for up to five years. In addition, back taxes and costs of prosecution can be assessed. Since an individual can be charged with more than one count of tax evasion, the foregoing numbers underestimate an individual defendant's actual civil and criminal liability.
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