Tax Evasion: Meaning, Definition, and Penalties

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Tax Evasion: Meaning, Definition, and Penalties

What Is Tax Evasion?

Tax evasion is a criminal practice in which a person or business avoids paying a genuine tax burden on purpose. Those who are discovered dodging taxes face criminal prosecution and severe punishments. Under the Internal Revenue Service (IRS) tax law, wilfully failing to pay taxes is a federal crime.

Key Takeaways

  • Tax evasion may be defined as either the unlawful nonpayment or underpayment of real tax responsibilities.
  • The IRS can detect tax evasion whether or not tax forms were submitted with the agency.
  • To establish tax evasion, the agency must be able to demonstrate that the taxpayer purposefully avoided paying taxes.
  • While tax evasion is against the law, tax avoidance is seeking lawful (within the law) techniques to lower taxpayer liabilities.

Tax Avoidance Vs. Tax Evasion

Understanding Tax Evasion

Tax evasion includes both unlawful nonpayment and criminal underpayment of taxes. Even if a taxpayer fails to file the relevant tax forms, the IRS may still establish if taxes are owing based on information provided by third parties, such as W-2 information from a person’s employment or 1099s. In general, a person is not regarded guilty of tax evasion unless the refusal to pay is deliberate.

Tax evasion happens when an individual or corporation unlawfully avoids paying their tax due, which is a criminal offense punishable by fines and penalties.

Failure to pay taxes on time may result in criminal proceedings. In order for charges to be brought, it must be shown that the taxpayer purposefully avoided paying taxes. Not only may a person be held accountable for unpaid taxes, but they can also be found guilty of official crimes and sentenced to prison time. According to the IRS, the penalties include up to five years in prison, a fine of up to $250,000 for individuals or $500,000 for businesses, or both, plus the expenses of prosecution.

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What Qualifies As Tax Evasion?

A number of variables are examined when deciding whether the act of failing to pay was deliberate. Most frequently, a taxpayer’s financial status will be scrutinized in order to determine if the nonpayment was the result of fraud or the concealing of reportable income.

Failure to pay may be considered fraudulent if the taxpayer attempted to hide assets by identifying them with someone other than themselves. This includes declaring income using a fraudulent name and Social Security Number (SSN), which may also be considered identity theft. For failing to declare employment that does not use typical payment recording systems, a person may be found to be hiding money. Accepting monetary payment for products or services supplied without properly reporting them to the IRS during a tax filing is one example.

Tax Evasion vs. Tax Avoidance

While tax evasion necessitates the use of criminal tactics to avoid paying correct taxes, tax avoidance employs legal measures to reduce a taxpayer’s liabilities. This may include charitable contributions to an authorized institution or the investing of earnings in a tax-deferred vehicle, such as an individual retirement account (IRA).In the case of an IRA, taxes are not paid on the invested money until the cash and any appropriate interest payments are withdrawn.

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