All About Tax Evasion
Tax evasion is a legal term that courts and legislatures have defined carefully. In essence, tax evasion is an intentional deception made by an individual or group of individuals that is done for the purpose of avoiding tax liabilities that are owed to the state or federal government. The difference between tax evasion and tax avoidance is that tax evasion is doing something illegal to avoid paying the taxes that are owed, where tax avoidance is finding legally permissible ways to avoid paying taxes. An obvious example of tax evasion includes the failure to pay taxes on income. Below, you will find a more detail discussion on the different acts that can be characterized as tax evasion under the law.
When people utilize loopholes in the law to ensure that they pay what they owe , this also is not tax evasion. A common example is the practice of transferring money to foreign countries to avoid taxes. When a person makes a transfer to another country, that country may not require the payment of taxes on foreign investments. However, when taxes are required according to US law, tax evasion may be occurring. If a person is hoping to get taxes free based on a loophole in the law, this is not a crime. However, if there is no loophole and a person is lying, hiding income or using some type of fraud, this likely constitutes tax evasion. Courts have ruled that the following actions can be the basis for tax evasion:
Consequences of Illegally Avoiding Taxes
Typically, the value of the tax evasion charge will determine how a defendant is prosecuted. In misdemeanor tax evasion cases, a defendant may face fines of up to $25,000 and/or one year in federal prison. For felony tax evasion charges, defendants may be fined upwards of $250,000 and sentenced to five years in federal prison.
If a taxpayer files a timely, non fraudulent return, the IRS must generally assess any tax deficiency within three years of the return due date or the date the return was filed, whichever is later. But for returns reporting substantial omissions of gross income, more than 25%, the statute of limitations is six years from the date the return was filed. And if there is an outright failure to file a return, the statute of limitations never runs. However, if the IRS makes a charge of willful tax evasion during its investigation, the statute of limitations for civil tax collection is suspended. While the most common tool used by IRS agents is the administrative summons, criminal charges may also be filed by the U.S. Attorney or state attorney general on behalf of the IRS.
Factors That Cause Tax Evasion to Become a Felony
When determining whether a tax evasion charge will be classified as a felony or a misdemeanor, the following factors will be taken into consideration:
- Amount of criminal activity – this may directly affect the level of charges brought against the offender. For example, if a taxpayer has committed tax fraud on a higher scale, then he or she may be charged with felony offense related to tax evasion and vice versa for those committing tax fraud on a lower scale.
- Type of criminal activity – there is a wide range on the type of criminal activity that falls under the tax evasion category. Some may be purely unintentional and others intentionally evasive of legal tax obligations to achieve financial gain.
- Level of effort to commit the criminal activity – the level of effort put into committing tax evasion will be a consideration when determining the criminal charge. If the actions were somewhat unintentional and not particularly evasive, the prosecution may consider leveling a misdemeanor charge.
Relevant Cases and Examples
In 2003, former MLB star Darren Daulton faced felony charges for not filing income tax returns with the state of Florida (specifically, Broward County). Daulton spent the majority of his career with the Philadelphia Phillies, where he was the starter for their World Championship team in 1993. In 1998, Daulton moved to Florida but never filed a return from 1998 to 2001, despite raking in annual salaries of at least $1 million and generating additional income until 1999. The state of Florida imposed a fine of $50 per day of delinquency from 1998 to 2002, which ultimately amounted to almost $50,000. Daulton would eventually be acquitted of the felony charges in December 2004.
Actress Winona Ryder was charged in January 2001 for shoplifting $5 , 500 worth of merchandise from Saks Fifth Avenue. Ryder was initially charged with a felony theft charge but was eventually convicted of misdemeanor grand theft and vandalism offenses. The case attracted significant media coverage.
In 2006, flashy TV personality Lenny DePaul (Tactical Response Team: The Makeover) received a 120-day jail sentence after pleading guilty to misdemeanor tax evasion. DePaul, who had worked for the Westchester County Police Department, will also be permanently disqualified from receiving a pension for his work with the department.
Music promoter Martin Garbus appeared before a judge in July 2006 for charges of felony failure to file tax returns. Garbus pleaded guilty to the charge, and was expected to serve 18 months in prison with three years of supervised probation.
Ways to Prevent and Deal With Tax Evasion
There are several ways individuals can prevent tax evasion and ensure that their returns are filed in accordance with the law. First, taxpayers should put together a dependable accounting system that maintains accurate data on income and expenditures. Then, when preparing their taxes for filing, individuals should avoid the temptation of inflating their expenses to reduce their overall tax liability.
To avoid the risk of tax evasion, individuals should use only qualified tax professionals to assist in preparing their return so as to ensure that the best practices are utilized to avoid errors. In addition, all tax records should be maintained in a safe location, utilizing an organizational system that makes them easy to access. If individuals know that they will be out of town at the time that their return will be due, they should apply for an extension in advance so that they will have enough time to file their return and do not use this as an excuse for avoiding payment of taxes. Finally, individuals should avoid procrastination and should file their returns on time to avoid any penalties.
If you have received a letter from the IRS notifying you of a criminal investigation or of a civil audit, it is important to hire experienced professionals to assist you in making the proper disclosures and presenting any information in the correct legal format to avoid potential allegations of tax evasion. First, individuals should contact a reputable tax attorney who can review their file with them and discuss any prior issues that may have violated the law. In addition, if individuals have not disclosed all of their income sources, this should be corrected so that they can be sure that they have no outstanding debts with the IRS. Finally, individuals should consult with an attorney to discuss the potential need for him or her to represent them in the event of a criminal investigation or in dealing with the IRS.
Getting Legal Help
Given the serious consequences of being convicted of tax evasion, it is of utmost importance to seek legal assistance if you are facing charges. Numerous attorneys across the state of California focus specifically on criminal tax matters. Those accused of tax evasion may avail themselves of resources offered by the state, including the Tax Evasion Crime Reporting Program (TECRP), which is designed to assist the public in reporting and curbing tax fraud. The TECRP was created as an internal revenue service in which the tax and law enforcement agencies work together to gather information from tips, leads, and other information received from the public, and pass this information onto the appropriate administrative or civil enforcement authorities. The TECRP also oversees and coordinates a number of tax fraud units that exist within several California government agencies. The TECRP is responsible for assisting the public in filing tax-related complaints to law enforcement agencies to investigate criminal tax fraud , or forwarding them onto the BOE or the CDTFA to address administrative tax violations; however, it is not a means to file claims for refunds or dispute assessments. Therefore, individuals seeking to dispute a tax assessment made by the CDTFA or the BOE should contact the office directly with the appropriate information to dispute the assessment. In addition to the TECRP, the California Association of Tax Attorneys (CATA) serves as a resource for potential and current taxpayers. The CATA’s website provides valuable information related to California tax law, including a list of qualified tax attorneys through its member list. Individuals may search tax attorneys by telephone number, firm name or by last name.