What Is Tax Evasion? Methods & Penalties Explained

Let’s say your tax preparer presents you with the amount of taxes you owe this year, and it’s much higher than expected. You’re pretty stressed and unhappy, but maybe it’ll be OK if you only pay a portion of it? What if you change a few of the numbers around to make it lower? Maybe that’s OK? After all, you’re still paying some taxes.

This, however, is tax evasion and is a serious offense. Tax evasion is purposely not paying or lowering the cost of your taxes. It can lead to criminal charges, and you can even spend time in jail for it. However, there are legal ways to lower your taxes, and you should avoid tax evasion at all costs.

This article outlines what tax evasion is, what the penalties are, and how you can avoid it.

What is tax evasion?

Tax evasion occurs when someone purposely and illegally underpays or does not pay taxes. People most often do this by declaring less income or overstating deductions. Committing tax evasion is a serious offense and can lead to some major consequences.

There are two main types of tax evasion: evasion of payment and evasion of assessment.

Evasion of payment

Evasion of payment is when someone hides taxable money or assets from the Internal Revenue Service (IRS). Two examples of this are hiding money in a family member’s bank accounts or concealing personal offshore accounts from the IRS.

Evasion of assessment

Evasion of assessment is when someone files a false return that leaves out income or claims phony deductions. This is the most common way people attempt to evade taxes.

Examples of tax evasion

You can commit tax evasion using various methods. Let’s review them.

Tax evasion in the real world

You don’t have to look far to see examples of tax fraud. Many people in the public eye have been jailed or suffered other punishments for committing tax evasion.

Recent policy changes and tax evasion

As you may have heard, federal executive policy changes could make more and smaller tax evaders more likely to get caught going forward.

The financial reporting proposal will require banks to provide the IRS with two additional data points to the information that is already supplied:

1. How much money went into the account over the course of the year,
2. And how much came out.

How would this information be useful to the IRS?

Imagine a taxpayer who reports $50,000 of income but has $5 million coming in and out of their bank account. It doesn’t take a forensic accountant to know something fishy is going on. Having this summary information would help the IRS when high-income people under-report their income (and under-pay their tax obligations). The new focus on enforcement makes avoiding both tax errors and tax evasion more important than ever.

How does the IRS catch tax evaders?

The IRS has software and computer systems that are designed to catch a number of inconsistencies in tax returns.

Although the IRS prefers to use interest and fees to deter tax evasion, it is terribly effective if it does decide to indict tax evaders. As the graphs below show, the IRS has consistently scored impressive indictment to conviction rates.

Proving tax evasion

Errors on your tax return or unpaid taxes, in and of themselves, are not tax evasion. You can’t be thrown in jail just for a simple mistake on a tax return. The tax code is confusing, so the IRS takes honest mistakes into consideration. Tax evasion occurs when someone purposely uses illegal methods to evade taxes.

So how does the IRS determine if someone was purposely trying to get out of paying taxes?

Penalties for tax evasion

Tax law is something the government takes very seriously. Committing tax fraud can have serious, lifelong consequences. The penalties provided for tax evasion depend on how the evasion was accomplished.

Are tax evasion and tax avoidance the same thing?

You may have heard the term tax avoidance before. Although it sounds similar to tax evasion, they are not the same. Tax avoidance and tax evasion share the similar goal of lowering taxes, but tax avoidance is legal.

You’ll still have to pay taxes with tax avoidance, but these methods can seriously lower the amount you need to pay.

Learn more about the differences between tax evasion and tax avoidance here.

Avoid both tax evasion and tax penalties

As mentioned before, the IRS cannot punish you for honest mistakes on your tax return. But, as also mentioned, they could still impose a penalty. In that case, they may send you a tax penalty letter or charge you 20% of the underpaid amount. So, although you might be able to get relief from IRS penalties, your best course of action is always to avoid penalties in the first place.

FAQ

What is considered tax evasion?

Tax evasion is when someone uses illegal means to lower the cost of or avoid paying taxes.

Who goes to jail for tax evasion?

Anyone can serve jail time for tax evasion if the IRS can prove that the unpaid tax exists and that the person purposely tried to avoid payment. The convicted taxpayer could be fined or spend time in prison.

What are the types of tax evasion?

Underreporting income, omitting income, or destroying records are common methods of tax evasion. People have also been known to falsify records or underpay taxes intentionally.

Avoid tax filing errors with the right assistance

Using tax preparation software can help you avoid making any errors that may result in an audit. It can also help you have an accurate tax return. This can help you avoid accidental errors resembling tax evasion or IRS penalties. Check out this year’s best tax preparation software to help you create a truthful and error-free tax return.

Camilla Smoot

Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.