Tax Evasion - Fraud Overview

In the United States, tax evasion means illegally avoiding a tax assessment or payment. This should not be confused with tax avoidance, which refers to using current tax laws to legally reduce the amount of tax payable. While tax avoidance is legal, tax evasion is not. The U.S. Government estimates that criminal tax evasion amounted to $345 billion, or roughly 14 percent of federal revenues, in fiscal year 2007.

Tax evasion can take many forms. Usually it involved individuals or corporations either not filing taxes or misrepresenting the amount they owe to the Internal Revenue Service (IRS tax evasion). Misrepresentation can result from:

  • Failing to file tax returns
  • Failing to report cash income or underreporting total income
  • Overstating or taking unauthorized deductions
  • Inflating or falsely claiming charitable donations
  • Omitting property or underreporting the value of an estate

According to the Internal Revenue Service, people who acquire money through illegal activities—including gambling, drug trafficking or theft—are required to report these profits as income. Often, they do not because this would be an admission of guilt that could result in criminal charges. Individuals who try to report these profits as income from legitimate sources can face charges for money laundering. Suspected criminals, such as Al Capone, have sometimes been successfully prosecuted for tax evasion when there was insufficient evidence to convict them of other crimes. Similarly, tax evasion can be added to charges for other crimes where the person arrested has earned illegal income.

Common Types of Tax Evasion

Most often, however, tax evasion applies to individuals who have not filed their tax returns accurately and on time. According to the U.S. government, approximately 3 percent of taxpayers do not file tax returns at all. Civil penalties for willful failure to file tax returns in a timely manner are based on the amount of tax actually owed. Therefore, if no tax is owed, no penalties are due. However, tax evasion is also a criminal matter. Thus, the taxpayer can also be sentenced to one year in prison for each year he or she willfully did not file a tax return. While there is a six year statute of limitations on federal tax crimes, there is no statute of limitations for civil actions, such as demands for taxes owed, for years in which no return has been filed.


Tax evasion constitutes a crime that may give rise to substantial civil penalties, imprisonment, or both. Section 7201 of the Internal Revenue Code states, "Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution."

Proof of the crime requires demonstrating beyond a reasonable doubt that the individual or corporation concerned had substantial tax liabilities, as a result of not filing or unreporting, and that the individual or corporation both knowingly and willingly attempted to evade the tax.

If you're being investigated for tax evasion, or tax fraud, consult with a tax lawyer immediately to defend yourself.

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