Although tax evasion is a serious crime, the IRS cannot criminally prosecute you for simple failure to pay your taxes, although it may pursue a variety of civil remedies such as seizure of your property. To be guilty of tax evasion, you must either misrepresent facts to the IRS concerning your tax obligation or attempt to conceal your property from the IRS through fraudulent means.
Examples of Civil Offenses
If you take a tax deduction based on a legal argument that the IRS disagrees with and fail to pay the amount the IRS says you owe it by the deadline, the IRS will assess civil penalties against you for late payment of taxes. In this case, you can request a hearing to argue for your point of view. If you act negligently -- for example, by itemizing your deductions and taking the standard deduction at the same time -- the IRS can impose additional civil fines. The IRS can also fine you $500 for submitting a frivolous tax return -- for example, a return that claims your tax liability is zero because the federal government lacks constitutional authority to tax state citizens.
Examples of Intentional Misrepresentation
An example of intentional misrepresentation would be claiming someone is a dependent whom you do not support or claiming a tuition deduction when you do not attend school or pay tuition for anyone who does. Another example would be deducting business expenses that were reimbursed by your employer before you filed your return or claiming the foreign-earned income exclusion when you did not work overseas during the tax year. Any of these acts can result in a prosecution for tax evasion.
Examples of Concealment of Assets
An example of concealment of assets would be transferring your assets to an overseas bank account, either in anticipation of an IRS tax assessment, after an IRS tax assessment or in response to an IRS notice of intent to levy on your property. Another example would be putting your assets into an irrevocable trust or gifting assets to a relative to avoid IRS seizure. In such cases, the fraudulent transaction can be reversed, your assets can be seized and you can be prosecuted for tax evasion.
The maximum penalty for individual tax evasion is five years in federal prison and a $10,000 fine, plus the expenses of prosecuting you. A corporation can be fined up to $500,000, and the corporate executives responsible for the tax evasion can be imprisoned. The maximum penalty is only assessed under the most extreme circumstances.