What Are the Penalties for Tax Avoidance?

There's no law against using the tax system to one's benefit and lowering overall tax obligation. Tax avoidance, as long as it is done through legal means, is not a crime and has no penalty -- except a lower tax bill, of course. Even the use of loopholes, so named because they provide legal means of skirting legislative intent, is not punishable by law. On the other hand, tactics that are not sanctioned by law constitute tax evasion, which is punishable by fine and/or imprisonment.

Identification

Tax avoidance is the use of legal methods to reduce the amount of taxes owed. By definition, tax avoidance is legal and bears no penalty. The Supreme Court went as far as to write, regarding Gregory v. Helvering, 293 U.S. 465: "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."

Features

Any act or method or organization permitted by law can be used for tax avoidance. Typically, this involves the reduction of taxable income through the giving of gifts and donations to charity. The creation of trusts and foundations, and the transfer of assets to them, can have the effect of lawfully avoiding some taxation. Though the U.S. generally taxes the worldwide income of its citizens, these international earners can usually reduce their taxes if they pay income tax in a foreign company, according to a tax treaty.

Evasion

Because of the similar names, tax avoidance can sometimes be mistaken for tax evasion. Evasion is the use of illegal means to lower a tax obligation. The characteristics of tax evasion include fraudulent under-reporting of income or capital gains, misrepresentation on customs forms (smuggling), false statements about taxes paid, or failure to file. Tax evasion is a federal crime and, as a result, carries criminal penalties.

Failure to Pay/File

If the Internal Revenue Service (IRS) suspects tax evasion, its first step might simply be to give the tax payer the opportunity to correct a supposed error. The IRS assesses a 0.5 percent failure-to-pay penalty per month on unpaid taxes. If no return was filed by the due date, the failure-to-file penalty of five percent of unpaid taxes (up to 25 percent of the unpaid taxes) is assessed. If the failure is not corrected, the IRS will likely conduct an audit and can eventually pursue criminal misdemeanor charges, carrying penalties of up to $25,000 and a year in prison for each period in which a tax return was not filed.

Felony Evasion

Willfully committing tax evasion is a felony offense. Filing a false return is a felony punishable by up to three years in prison and/or $100,000 in fines. Other forms of tax evasion carry a prison sentence of up to five years for each charge. Because conviction can come on multiple counts, consecutive sentencing can produce a harsh penalty. Often, tax evasion is charged in cases where an organized criminal operation did not failed to report illicit income. In these cases, the penalties for tax evasion represent most or all of the criminal sentences ultimately imposed.

References

• Tax Evasion Penalties
• Penalties For Tax Evasion
• Tax Evasion

Resources

• Tax Avoidance
• What Does Tax Avoidance Mean?
• Penalties for Tax Evasion