Tax Evasion Penalties
Tax Evasion Penalties: Tax evasion penalties are on the rise. The IRS has developed an aggressive enforcement strategy for foreign account and income tax compliance. The failure to stay in compliance may result in offshore penalties. Since the matter involves criminal violations, penalties may result in criminal FBAR and criminal FATCA penalties. If a person is out of compliance and wants to avoid a criminal investigation, they may qualify for various FBAR Amnesty programs, collective referred to as voluntary disclosure.
Criminal and Civil Tax Evasion Violations
Tax evasion penalties may result in civil and criminal penalties; it is a serious violation.
This is because unlike other IRS violations, tax evasion is a crime.
Unlike tax fraud, which can be civil or criminal — evading tax is a crime. If a person is investigation, charged and found guilty of tax evasion, the punishment may results in both fines and incarceration. There are various ways the IRS or DOJ may learn of the fraud, including: someone reporting you to the IRS; IRS audit or examination; and whistle-blowers.
Tax Evasion occurs when a person intentionally and artificially reduces their tax liability to the IRS.
A person typically commits tax evasion when they:
- Do not submit a tax return when they know they should
- Artificially reducing or omitting Income
- Include false personal deductions on the tax return.
- Include false business deductions on the tax return.
Since the goal of the individual is to falsely reduce the tax liability, it is considered an attempt to “evade” taxes, and hence a potential criminal tax evasion charge.
Tax evasion penalties can are on a spectrum. Some taxpayers may get away with a warning, while other may end spending years behind bars, and pay hundreds of thousands (even millions) in penalties.
When it comes to Tax evasion penalties will typically include:
- Penalty for not filing taxes
- Filing taxes late
- Artificially reducing income
- Fraudulently claiming expenses
Some of the more common questions we receive about tax evasion penalties, include:
What is Considered Tax Evasion?
Tax evasion is when a person knowingly avoids taxes, by either excluding income from their tax return, or falsifying expenses and deductions to artificially reduce their income — and thereby reducing their tax liability
Can you go to Jail for Tax Evasion?
Yes. Unlike other types of tax violations, tax evasion is a crime, which may result in monetary fines and prison
What are the Income Tax Penalties for Tax Evasion?
They can range, but oftentimes they will reach several hundreds of thousands of dollars when a person is convicted of several counts of tax evasion (and other related crimes). The person may also be sentences to prison.
What is the Tax Evasion Penalty for Not Reporting Income?
Just because someone does not report income, does not mean they are guilty of Tax Evasion. Sometimes, if a person was negligent, or the government cannot show beyond a reasonable doubt that a crime was committed, the penalties for not reporting income are significantly less than the penalties for tax evasion.
How Long Do You Go to Jail for Tax Evasion?
It varies, but tends to range from 1-5 years.
Can the IRS Put You in Jail?
No, but the IRS refers to your the Special Agents for a criminal investigation, and the IRS Special Agents then refer you for prosecutions (and some people are then sentenced to jail)
Relevant Criminal Tax Code Sections
26 USC 7201 – Tax Evasion
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.
7206. Fraud and false statements
Any person who—
(1) Declaration under penalties of perjury
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or
(2) Aid or assistance
Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or
(3) Fraudulent bonds, permits, and entries
Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed, or advises, aids in, or connives at such execution thereof; or
(4) Removal or concealment with intent to defraud
Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or
(5) Compromises and closing agreements
In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully—
(A) Concealment of property
Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or
(B) Withholding, falsifying, and destroying records
Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax shall be guilty of a felony
7203. Willful failure to File Return, Supply Information, or Pay Tax
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than 25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure.
**In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.
Willfully failing to file an FBAR or False FBAR — 31 U.S.C. § 5322
(a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.
(b) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.
(c) For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues. (d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.
Three (3) Common Examples of Tax Evasion
There are many different ways a person can file a fraudulent tax return. For example, a person may underreport income (which is especially true in situations in which the income was cash (and not easily traceable), and/or the income was earned from overseas and no form-1099 or equivalent was issued.
Alternatively, a person may knowingly over-report deductions or claim business expenses that don’t really exist, in order to reduce tax liability.
Omitting Income Example
Steven resides in the United States but has various investments overseas that earn income abroad. Steven knows he’s supposed to report the earnings to the IRS. But, Steven also knows that the IRS has not entered into a tax treaty with this particular country, and that the Foreign Financial Institutions (FFIs) of this country are not reporting Stevens financial information to the IRS on a U.S. equivalent form 1099.
Therefore, Steven intentionally excludes this income on his US tax return. This would be an example of intentionally falsifying a tax return in order to reduce the amount of income — and therefore reduce tax liability.
Falsifying Business Expenses
Falsifying business expenses comes in many different shapes and sizes. For example, Michelle has a foreign consulting business in which she travels around the country trying to retain clients to purchase her design services.
Michelle also likes to travel as a hobby, eat at fine restaurants, and drive fancy cars. Therefore, Michelle expenses certain pricey dinners and vacations as business expenses, when clearly Michelle was not engaging in any business for the expenses she claimed.
Therefore, Michelle has falsified her tax return by including expenses which are false (aka not business expenses).
Taking Improper Tax Deductions
This is also very common scenario in which a person includes deductions on their tax return that are simply not true. For example, David does not have a home office which he uses specifically for business, but he claims a portion of a very large den in his home as a home office in order to reduce his taxes.
In addition, David also included medical expenses that he never really had in order to increase his schedule A itemized deductions, and there by reducing his tax liability.
Finally, David also has two rental properties, in which he falsified improvements to make it seem like they were expensive repairs (so he could deduct instead of amortize the expenses), and thereby reduce the net income that was generated from the rental properties. This also reduces income and thereby artificially reduces his tax liability – which is illegal
IRS Special Agents & Criminal Investigations
When this happens, you will be referred to the IRS Special Agents for a criminal investigation.
Please note, the IRS does not tell you that they have referred your case to the special agents. Rather, you typically meet the Special Agents assigned to your case when you least expected it.
The IRS Special Agents travel in pairs, and show up to your house, work, club, event unannounced hoping to interview you
Do not speak with them, and kindly tell them that you have an attorney, or that you will be obtaining an attorney and that the attorney will contact the agents.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.