Tax evasion is the illegal act of attempting to evade tax by deliberately hiding one's income, falsifying records, and various other methods. Tax evasion is usually a federal crime for which people can face jail time and fines. Read on to learn more about how it works and some legal consequences for those who get caught in the act.
A Brief History of Tax Evasion
In ancient times, people would use creative accounting tricks in order to hide their wealth from the government. For instance, they would over-inflate expenses or under-report income. These methods were often not successful because there was nowhere near as much regulation or tracking back then. But, the IRS has become much more sophisticated in recent years and the methods that were once successful have since been discovered.
A Real-Life Example of Tax Evasion
Here's one of the most famous cases in history: In 1990, Leona Helmsley was convicted of tax evasion after failing to pay $1.2 million in taxes. She had hidden her fortune in multiple accounts including Swiss bank accounts and had also not paid property taxes on one of her New York apartments for over a decade. She spent 18 months in prison for this crime and was fined an additional $7 million.
How Tax Evasion Is Different From Tax Fraud
In many ways, tax evasion is very similar to tax fraud. Both are crimes in which the person committing it attempts to illegally avoid paying taxes. The difference is that tax evasion involves hiding your income rather than lying on your tax return.
Tax Fraud: A Broad Term
There are many different kinds of crimes that fit under the category "tax fraud," including attempting to evade taxes by hiding income, not paying your fair share, or filing a false return. This broad term makes it difficult to determine which crimes fall under the category of tax evasion and which don't, but most types of tax fraud have at least some elements of tax evasion in them.
Examples of Tax Evasion
There are many different forms of tax evasion and one way to avoid being targeted for it is to become familiar with all of the different kinds. Here are some examples:
Over-inflating expenses and inflating deductions:
For example, if you were an accountant who was inflating estimates so that you could claim over-inflated expenses on your income tax return. You could also use this method to hide income or value assets under a lower amount in order to make it look like you have less money.
Falsifying records:
For example, if you were a doctor who falsified records in order to avoid paying back taxes for the money you made from pharmaceutical companies.
Concealing income:
This can mean lots of different things but is usually a way of avoiding paying taxes by not reporting the income that you make. For example, if you were a doctor who earned over $200,000 but chose to not report your total earnings your tax rate would be lower.
Not paying tax on your earnings:
For example, if you were a doctor who failed to pay taxes on income earned overseas.
Evading penalties:
People may also try to evade penalties by filing false returns or not paying taxes that are due after they have been caught doing so. This is often done intentionally in order to make the IRS think they will be more likely to agree when they come after the individual again.
Refusing to pay fines:
People may also try to avoid paying a fine for tax evasion even after being caught. They may set up a payment plan or refuse to accept the full fine because they know that the IRS can catch them whenever they want.
Buying IRS agents:
There have also been instances in which people have tried to use bribes to get a tax audit or accept an offer of immunity.
Filing false affidavits:
This is a way that people may try to attempt to hide information from the IRS and has nothing to do with avoiding taxes. For example, people may be underreporting their income by giving false information about the time they spend at work for example.
Filing false claims:
This is very similar to filing false affidavits and involves deliberately making false claims about something in order to receive a benefit or avoid paying for something. For example, you might falsely claim that you own your home when you don't in order to be allowed to deduct your mortgage interest from your taxable income.
Transferring assets:
People may also try to avoid taxes by transferring assets between different companies or family members in order to lower their taxable income. This can involve giving a company money and then pretending like it doesn't belong to you or owning stocks that are hidden under the names of other people.
Filing false information:
People may also try to hide money in order to avoid paying taxes and file false information. For example, if you were a doctor and listed a $250,000 clinic as only having an income of $50,000 on your tax return so that you would be able to claim a higher standard deduction.
Disguising income:
Some people might also try to disguise their income in order to avoid paying taxes, which is a much more risky process because it requires the use of the same level of resources required in order to avoid paying taxes legitimately. For example, a person might earn $2,000 from a side hustle and then try to avoid paying taxes by claiming that they were driving for Uber and then using their tips from that to report the income on their tax return as it would be much lower.
Bribing an agent:
People who have been caught by the IRS may also bribe an agent in order to get favorable treatment from them. They might use criminals or other people in the underworld, for example, in order to bribe agents in ways that are illegal and unethical.
