(Post from Jeremy Bernard regarding tax evasion – mainly based on US law but also more generally with comment in respect of civil fraud in the UK, US & beyond)
Numerous taxpayers become concerned with the question as to what constitutes tax evasion whenever their taxes become due. This concern is quite understandable, considering the major consequences of this particular tax crime. However, most taxpayers have no valid reasons to fear prosecution for tax evasion as long as they have not intentionally attempted to defraud the government.
What constitutes tax evasion?
Intentional use of illegal methods for the purpose of evading or attempting to defeat payment of a known or believed to be owed tax constitutes tax evasion. The tax laws distinguish the differences between attempts to evade payment and attempts to avoid accurate assessment for taxation purposes. The law also distinguishes between avoiding taxes using legal methods and evading taxes through illegal methods. Legal avoidance of taxes does not require the taxpayer to conceal or misrepresent information, whereas illegal evasion does require it.
An example of evading payment would be the concealment of assets and funds that the I.R.S. might seize in order to collect payment of an established tax liability. For instances, an individual may temporarily place a yacht or vehicle under a relative’s ownership to avoid having it sold off to pay back taxes. A corporation may transfer funds or property from a parent company to a subsidiary company to avoid having it confiscated by the Internal Revenue Service for payment of taxes.
Avoiding accurate assessment can include any instances of a taxpayer hiding or misrepresenting information regarding earned income, assets, or use of funds and assets. It can also include instances where a person or company claimed more tax deductions than they were entitled to take. Mostly carried out by individual taxpayers and small businesses rather than by large corporations, avoiding assessment is the most common form of tax evasion.
Penalties and prosecution
Tax evasion may lead to civil fraud and criminal fraud charges, depending on the amount of fraud involved. In order to prosecute an individual or business for tax evasion, the I.R.S. must prove beyond a reasonable doubt that three things occurred simultaneously. First, the prosecutor must provide proof that the tax liability existed. Next, the prosecutor must prove that the taxpayer was not willing to pay the existing tax. Then the prosecutor must prove that the taxpayer took affirmative action to avoid payment of the tax, either by avoiding assessment of the tax or by deterring collection of the payment. The prosecutor must prove the tax evasion was not merely the result of an unintentional error or difference of opinion.
Most instances of tax evasion are treated as civil fraud, with the punishment being a remedial action taken by the government. This punishment usually consists of the agency assessing the correct amount owed and then imposing a penalty. The civil penalty is 75 per cent of the underpayment portion that was due to the fraud, and has to be paid along with the total amount of the corrected tax amount. Additionally, a failure to pay penalty of .05 percent of the amount owed each month the tax was not paid is added to the total amount owed.
Punishment of civil and criminal fraud (for defence of which in the UK see for example http://www.stephenlickrish.com/) typically includes disallowment of certain deductions as well as penalty fees. However, when prosecuted as a felony crime, tax evasion criminal fraud may also result in fines, as well as imprisonment. Individuals face fines up to $250,000, while businesses face fines up to $500,000. Convictions for criminal tax fraud typically result in prison terms of three to five years, as well as fines and the aforementioned civil fraud remedial actions. Thus, paying the original tax makes a better option to paying the consequences of tax evasion whenever the I.R.S. catches on to the evasive act.
Bringing a Case for Civil Fraud
Note also that if you are a business owner and are looking to bring a civil fraud action against another person or business, for instance via counterfeit prosecution, there are specialists such as Edmonds, Marshall, McMahon (in the UK), or Omega Investigations (in New Zealand) who can help you.
Internal Revenue Manual: http://www.irs.gov/irm/part38/irm_38-003-001.html
I.R.S. Tax Topics: http://www.irs.gov/taxtopics/tc653.html
Tax Crime Handbook (2009): http://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf
About the author
Jeremy Bernard is a freelance writer who focuses on finance, taxation, financial regulation, banking, international business & trade, commerce and other related topics. Self-filers can benefit immensely from this infographic on doing your own taxes.