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The process whereby a person, through commission of fraud, unlawfully pays less tax than the law mandates.
Tax evasion is a criminal offense under federal and state statutes. A person who is convicted is subject to a prison sentence, a fine, or both. The failure to file a federal tax return is a misdemeanor, but a consistent pattern of failure to file for several years will constitute evidence that these failures were part of a scheme to avoid the payment of taxes. If this pattern is established, the violator may be charged with a felony under section 7201 of the Internal Revenue Code.
The U.S. Supreme Court, in Spies v. United States, 317 U.S. 492, 63 S. Ct. 364, 87 L. Ed. 418 (1943), ruled that an overt act is necessary to give rise to the crime of income tax evasion. Therefore, the government must show that the taxpayer attempted to evade the tax rather than passively neglected to file a return, which could be prosecuted under section 7203 as a misdemeanor. A person who has evaded taxes over the course of several years may be charged with multiple counts for each year taxes were allegedly evaded.
According to the Supreme Court in Sansone v. United States, 380 U.S. 343, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965), a conviction under section 7201 requires proof beyond a reasonable doubt as to each of three elements: the existence of a tax deficiency, willfulness in an attempted evasion of tax, and an affirmative act constituting an evasion or attempted evasion of the tax.
An affirmative act is anything done to mislead the government or conceal funds to avoid payment of an admitted and accurate deficiency. Affirmative behavior can take two forms: the evasion of assessment and the evasion of payment. Affirmative acts of evasion include evading taxes by placing assets in another's name, dealing in cash, and having receipts or debts paid through and in the name of another person. Merely failing to pay assessed tax, without more, does not constitute tax evasion.
The keeping of a double set of books or the making of false invoices or documents can be proof of tax evasion. In some cases the mailing of a false return may constitute the overt act required under section 7201.
Tax evasion is using illegal means to avoid paying taxes. Typically, tax evasion schemes involve an individual or corporation misrepresenting their income to the Internal Revenue Service. Misrepresentation may take the form either of underreporting income, inflating deductions, or hiding money and its interest altogether in offshore accounts. The U.S. Government projects that fiscal year 2007 resulted in the government losing $345 billion because of tax evasion.
Individuals involved in illegal enterprises often engage in tax evasion because reporting their true personal incomes would serve as an admission of guilt and could result in criminal charges. Individuals who try to report these earnings as coming from a legitimate source can face money laundering charges.
In the United States, tax evasion constitutes a crime that may give rise to substantial monetary penalties, imprisonment, or both. Section 7201 of the Internal Revenue Code reads, “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.”
Proof of the crime requires first proving the attendant circumstance that an unpaid tax liability exists. Second, the prosecution must prove some affirmative act by the defendant to evade or attempt to evade a tax. Third, prosecutors most show that the defendant possessed the specific intent to evade a known legal duty to pay. To convict, the jury must find the defendant guilty of each of these elements beyond a reasonable doubt.But tax evasion must not be confused with IRS tax relief.
Mertens, Jacob, Jr. 1996. Mertens Law of Federal Income Taxation. Rochester, N.Y.: Clark Boardman Callaghan.