Tax Evasion Laws

A defendant charged with tax evasion may face a heavy fine and years in prison. However, this type of case may be more complex than it appears at first glance. A taxpayer should take care to preserve any defenses that may be available to them by consulting an attorney and refraining from talking to law enforcement in the meantime. Any information that they divulge in good faith could come back to haunt them should a prosecutor choose to pursue charges.

What Is Tax Evasion?

Tax evasion usually involves an overt and intentional effort to illegally dodge a tax.

Elements of Tax Evasion

26 U.S. Code Section 7201 is the core federal law prohibiting tax evasion. A prosecutor can get a conviction under this statute by showing that the defendant sought to evade or defeat any tax under the Internal Revenue Code, or the payment of the tax. (Note that the prosecutor does not need to show that the defendant succeeded in preventing the assessment or payment of the tax.) Courts generally have interpreted the statute to require an affirmative act, rather than a mere failure to do something. In addition, the prosecutor must prove a mental state element. The defendant must have acted “willfully."

Various state laws also prohibit tax evasion. Some states have enacted statutes specific to certain types of taxes. For example, the Retailers’ Occupation Tax Act in Illinois defines an offense called “sales tax evasion.”

Examples of Tax Evasion

One of the most spectacular tax evasion episodes in U.S. history involved telecommunications mogul Walter Anderson. He pleaded guilty to two counts of violating Section 7201 in 2006 after the federal government alleged that he had used offshore corporations and bank accounts to avoid paying taxes on nearly half a billion dollars earned from his business ventures between 1995 and 1999. Anderson was sentenced to nine years in prison

Gangster Al Capone wreaked havoc in Chicago for much of the pre-Great Depression period called the “Roaring Twenties.” His most violent crimes did not come back to haunt him, but his efforts to evade income tax for 1925 through 1927 did. Capone received an 11-year sentence for these and other tax violations, snuffing out his reign of terror.

Offenses Related to Tax Evasion

Some other offenses that might be charged in situations similar to those supporting tax evasion charges include:

• Tax fraud: violations of various other criminal tax statutes beyond the provision targeting “tax evasion,” such as failing to file a tax return or filing a fraudulent return
• Perjury: may be charged when someone lies about their tax obligations under oath, or signs a tax document “under penalties of perjury” without believing that the material information in it is true
• Bribery: could be charged if a taxpayer tries to pay a government investigator to turn a blind eye to tax evasion
• Forgery: perhaps a tax evasion scheme involved a fake or falsified legal instrument

A defendant might face multiple charges at state and federal levels. Prosecutors often try to wrap up these cases efficiently through plea deals. They might persuade a defendant to plead guilty to some charges in exchange for dropping other charges or seeking lighter penalties.

Defenses to Tax Evasion

Many defenses to tax evasion charges involve arguing that the prosecution cannot prove one or more elements of the crime. A defendant might assert that they did not commit an affirmative act, or that they did not act willfully. An honest mistake does not warrant a conviction. Perhaps the defendant relied on advice from a tax advisor whom they reasonably trusted. A defendant might even question whether they owed the tax that they allegedly tried to evade. More generally, they might argue that the evidence is not strong enough to prove the charge beyond a reasonable doubt.

In other cases, a defendant might raise procedural arguments. Law enforcement may have seized evidence by violating Fourth Amendment restrictions on searches and seizures. This could result in the exclusion of that evidence, potentially preventing the prosecution from proving the charge. Another example of a procedural defense is the statute of limitations. This usually bars a prosecutor from pursuing a charge once a certain time expires.

Penalties for Tax Evasion

A violation of the federal tax evasion statute is a felony that may result in imprisonment for up to five years. A defendant also may be ordered to pay a fine of up to $100,000 and the costs of prosecution. (The potential fine extends up to $500,000 for corporations.)

State tax evasion laws may impose harsh penalties as well. For example, tax evasion in Florida is a third-degree felony. This carries up to five years of imprisonment and a maximum $5,000 fine. The Massachusetts tax evasion statute imposes identical penalties to the federal statute. In Colorado, tax evasion is a class 6 felony, which carries 12-18 months of imprisonment. A defendant also may be ordered to pay a maximum $100,000 fine ($500,000 for corporations) and the costs of prosecution.

Last reviewed October 2024