Tax evasion, also known as tax fraud, is an illegal attempt of a taxpayer to evade assessment or payment of a tax for certain purpose. Conviction of tax evasion may lead to crimes and imprisonment. In other words, if you evade your tax payment for purpose, you might be arrested by the federal government.
Tax evasion is different from tax avoidance. Tax avoidance is a legal utilization of the tax regime to reduce the amount of tax. One example for tax avoidance is tax credit. Taxpayers could use tax credit to avoid certain tax payments, while they still need to report their yearly tax.
Tax evasion is separated from this action, since tax evasion is escaping the tax payment in an illegal way, and those who convicts tax evasion usually do not complete any tax assessment. Generally speaking, tax evasion is illegal, while tax avoidance is legal.
Those who convict tax evasion might show (1) the existence of an unpaid tax, (2) an affirmative act contains an evasion or attempted evasion of either the assessment or payment of that tax, and (3) willfulness. If you accidently miss one tax payment or tax assessment, you will not be convicted as tax evasion. Only those who escape tax for purpose would be convicted. The following actions might trigger a tax evasion. For example, if you are
- not reporting your cash income;
- less than your actual income;
- hiding money in overseas bank accounts;
- improperly claiming tax deductions;
- taking personal deductions on your business tax returns;
- falsely claiming or inflating your donations to charity;
- under reporting the value of an estate;
- paying your employees in cash to avoid paying payroll taxes.
Once you voluntarily escape from a tax payment for many times, it’s likely that the IRS would suspect you have committed the tax evasion. The standard measure of tax evasion is the “tax gap,” which refers to the amount of taxes that are unpaid on time. If you escape tax payment for a significant amount, you might even go to jail.