Tax evasion is a federal felony crime that can result in up to five years imprisonment. Here's how it works, and what the prosecutor would have to prove.
Tax evasion is a felony, and perhaps the most infamous crime in the Internal Revenue Code. (26 U.S.C. § 7201.) To convict a defendant of this offense, the prosecutor must prove a tax deficiency (failure to pay taxes) and an intentional effort to avoid taxes.
A tax deficiency occurs when someone hasn’t paid as much in taxes as is owed. Some courts require a “substantial” deficiency for a tax evasion conviction, but most hold that any shortcoming will suffice. The extent of the deficiency is measured by the tax amount that hasn’t been paid, not by the amount of unreported income.
As with any other crime, the prosecution may prove the offense through direct evidence. But finding clear proof of unreported income can be difficult. Investigators often don’t have access to taxpayers’ private records.
Without direct proof, prosecutors must rely on circumstantial evidence—any fact that leads to a reasonable inference that something has occurred. Among the sources the government uses to search for circumstantial evidence of unreported income are
- net worth
- bank deposits, and
- cash payments.
A taxpayer can try to disprove what the government alleges is a tax deficiency. She might attempt to show that the income in question is nontaxable, that the government’s computation is flawed, or that a deduction or credit negates the deficiency.
Effort to Evade
In order to prove an attempt to evade, the government must demonstrate that the taxpayer took some kind of affirmative action; simple neglect isn’t enough. The government must generally establish that the taxpayer misrepresented her ability to pay taxes or tried to hide assets from the IRS. Several kinds of behavior intended to mislead or conceal will satisfy the effort-to-evade element. These include, but aren’t limited to
- filing false returns
- hiding assets or income sources
- placing assets in others’ names
- conducting transactions in others’ names
- destroying records
- keeping two sets of books
- making fake documents, such as invoices
- falsely entering or altering information
- consistently failing to document transactions, and
- dealing primarily in currency—for example, gold coins.
The government must show that the taxpayer specifically intended to violate the law. It’s not enough that he was merely careless, or that he misunderstood his legal responsibilities. On the other hand, the kinds of behavior detailed above usually suggest—and can be used as circumstantial evidence of—the intent to elude tax obligations.
Even if not objectively reasonable, a taxpayer’s honest belief that he isn’t cheating—perhaps because of some kind of ambiguity in the law—is a defense against tax evasion charges. To assess the legitimacy of this kind of defense, certain factors are relevant, including the taxpayer’s
- current conduct
- record of compliance with tax laws, and
- level of knowledge.
Proof of reliance upon the advice of a professional can also support the taxpayer’s assertion that she didn’t intend to evade taxes. But for this defense to apply, she must establish that she provided the professional, such as an accountant or lawyer, with complete and accurate information.
The taxpayer who claims an absence of intent to evade faces an uphill battle: Courts view these state-of-mind defenses skeptically. Furthermore, evaders can’t justify their actions by insisting that they disagree with policy or believe that a tax statute is unconstitutional. Other failed defenses include inability to pay and intent to pay in the future.
A felony tax evasion conviction carries a maximum imprisonment of five years, a fine of up to $100,000, or both. If the defendant is a corporation, the fine can be up to $500,000. The sentence depends on several factors, chief among them the amount of taxes evaded. Several circumstances will increase the punishment. These include the defendant's failure to report a criminal source of substantial income and using sophisticated means to commit the offense.
See an Expert
If you are charged with a tax crime, or are simply being investigated for one, contact an experienced criminal defense attorney immediately. Look for someone who regularly handles federal tax cases. Only an experienced attorney will be able to assess the strength of the case against you, explore any possible defenses, and represent your best interests along each step of the way.