What Is Tax Evasion?
Written by
Dawn Allcot
Edited by
Elizabeth Constantineau
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If you have unpaid tax debt, you might wonder if you can get in trouble for tax evasion. But what counts as tax evasion and what penalties could you be facing? Understanding what tax evasion is can help you face your situation and take steps to pay off your debt. Read on to learn more.
What Is Tax Evasion?
Tax evasion is a willful refusal to pay your taxes, including taxes from earned income, capital gains tax and even property tax. Tax evasion may include trying to hide income from the IRS in an effort to pay less taxes.
Business owners may try to evade taxes by failing to submit payroll taxes, including Social Security and Medicare tax, which they withhold from employee paychecks.
Ultimately, though, tax evasion will catch up to individuals and business owners. Tax evasion comes with hefty penalties, fines and, depending on the amount you owe, jail time of up to five years. But how do you know if what you are doing is considered tax avoidance, which is legal, or illegal tax evasion?
Tax Avoidance vs. Tax Evasion
Many businesses and individuals use tax avoidance to legally reduce their tax bills. You can write off common tax deductions, which may put you into a lower IRS tax bracket. That means your income will be taxed at a lower rate, reducing your overall tax liability.
You can also legally claim tax credits, such as the Child Tax Credit or credits for continuing education, to reduce your tax bill.
However, if you are participating in tax evasion, you might claim dependents who do not exist so you can receive a tax write-off. You could falsify your income by failing to report the money you made that year. You could exaggerate business deductions. Some business owners even keep two sets of books — one that tracks their real earnings and another, showing less profit and more expenses, that they use to file taxes.
Penalties for Tax Evasion
Penalties for tax evasion can range from hefty fines to jail time, depending on the extent of the crime. Tax evasion is a federal crime and can carry penalties of up to $100,000 or $500,000 for corporations. You could also face imprisonment for up to five years.
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The United States Sentencing Commission shared that 68.7% of offenders were sentenced to prison for tax fraud, with an average sentence of 16 months.
Sentences may be increased if you use sophisticated tactics to conceal your tax fraud activities, had a leadership role in the crime, abused a public position of trust or impeded the administration of justice, such as failing to provide financial records when requested.
How Do People Get Caught for Tax Evasion?
The IRS typically catches people for tax evasion or tax fraud when an IRS auditor or collections agent detects potential fraud. The IRS will launch a preliminary investigation, including interviews with third parties and a review of the individual or business financial records, including bank statements.
If the case goes to trial, it’s highly likely the taxpayer will be prosecuted. According to the IRS website, the IRS has a conviction rate exceeding 90%. In 2022, the IRS Criminal Investigation Department identified more than $31 billion in unpaid taxes from tax and financial crimes.
Can You Go to Jail for Tax Evasion?
In spite of the high conviction rate, most individual taxpayers won’t go to jail for tax evasion, especially if their income is from a legal source and not related to drug trafficking or other crimes.
The IRS looks for patterns that show willful tax evasion, such as failing to file taxes for years, under-reporting large amounts of income or even claiming false dependents on your tax returns.
Even if you under-report income and face an audit, you may be able to avoid jail time by being honest with the IRS about your income and expenses and negotiating a payment plan or installment agreement.
Final Take
If you’re facing tax debt that you can’t pay, or have failed to file taxes in recent years, you might want to consider consulting with a tax attorney or another professional. The worst thing to do is ignore IRS tax debt.
FAQ
Here are the answers to some of the most frequently asked questions regarding tax evasion.- What are examples of tax evasion?
- Examples of tax evasion include underreporting income, claiming dependents who don't qualify based on IRS rules or exaggerating tax deductions.
- What is the difference between tax evasion and not paying taxes?
- Tax evasion is considered a felony and occurs if you willfully fail to pay taxes due. On the other hand, if you are facing financial hardship and can't pay your taxes, you may be able to negotiate a payment plan or offer-in-compromise with the IRS.
Information is accurate as of March 11, 2024.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- IRS. 2023. "IRS-CI releases FY2022 annual report highlighting more than 2,550 investigations, 90% conviction rate; enforcement actions focused on tax fraud, money laundering, cybercrimes."
- H&R Block. "Who Goes to Prison for Tax Evasion?"
- United States Sentencing Commission. "Quick Facts."
- Eisner Gorin. "TAX EVASION."
- IRS. 2024. "How Criminal Investigations Are Initiated."
