Penalties for Tax Evasion

Businessman attempts to avoid taxes

There are legal strategies for reducing your tax bill, but if you cross the line and break the law, you can face criminal charges for tax evasion. Tax evasion can lead to significant penalties, including jail time. While charges are rare, if you are convicted, the risk of jail time is high.

Statistics from the United States Sentencing Commission confirm that about two out of three (63%) convicted tax evasion offenders get sentenced to imprisonment. On average, these individuals will spend over a year behind bars.

Are you currently falling behind on paying your tax obligations? Have you underestimated your income on official forms to the IRS in the past or intentionally attempted to receive tax deductions you weren’t eligible for? If so, then you might be concerned about the potential penalties you could face.

Below, we’ll go over exactly what tax evasion, avoidance, and fraud means under the law. We’ll also discuss the potential penalties for tax evasion and avoidance. To get help now, contact the legal team at Wiggam Law today.

Tax Evasion vs. Tax Avoidance: What’s the Difference?

Terminology is very important when it comes to dissecting your tax charges or penalties. Three terms that are often used interchangeably but mean very different things are tax fraud, evasion, and avoidance.

In general, tax avoidance is a perfectly legal strategy for minimizing your overall tax burden, and this type of behavior doesn’t come with any sort of consequence or penalty. Tax avoidance is a very common strategy that many taxpayers use when they file taxes every year. You can take very aggressive positions to reduce your tax liability and maximize your income as long as they are legal.

Tax fraud is a term that encompasses both civil and criminal tax evasion. Tax evasion is the illegal act of attempting to avoid paying the taxes you or your business legitimately owe. Tax evasion is considered a crime because taxpayers have a legal obligation to pay their fair share of taxes.

So, what’s the difference? In general, tax evasion means the taxpayer isn’t paying the tax burden they owe, whereas tax avoidance means the taxpayer is paying their fair share but taking advantage of the benefits and advantages allocated by various laws and tax codes.

Since both of these terms are so similar, it can be difficult to determine what type of action would be considered legal avoidance versus illegal evasion. Below, we’ll go into more detail defining exactly what types of behaviors are considered tax avoidance and tax evasion.

What is Tax Avoidance?

Tax avoidance is a combination of strategies that many taxpayers use to reduce their overall tax burden. Tax avoidance does not mean intentionally failing to pay the IRS. It also doesn’t mean skirting the tax laws in order to deceive the IRS, defraud the tax agency, or somehow get away with not paying what is owed.

Instead, tax avoidance is the utilization of existing tax laws, codes, and rules to a taxpayer’s benefit. These tax strategies often reduce or even eliminate a taxpayer’s overall tax burden.

Legal Tax Avoidance Strategies

One of the most common legal tax avoidance strategies is to claim tax credits that are available to you. Most taxpayers are eligible for at least one type of credit, but it will take some research to determine what you can apply for.

Depending on your situation, you could earn a tax break based on having dependents, paying for child care, maintaining a successful green energy system, paying student loan interest, giving money to charity, or for other things you’ve done in the current tax year.

Another type of legal tax avoidance strategy is to use available deductions to reduce your taxable income. For instance, you could deduct your business expenses from your business income, which would reduce the overall amount of income you’d get taxed on.

Other types of strategies include:

  • Using estate tax exemptions
  • Claiming capital gains exemptions for the sale of your home
  • Starting a business
  • Optimizing your business deductions by taking advantage of accelerated depreciation or Section 179 rules
  • Utilizing business structures such as S-corps to reduce self-employment tax
  • Taking advantage of self-rentals to shift income from self-employment to rental income
  • Maximizing your retirement contributions
  • Investing in municipal bonds
  • Using other tax loopholes to reduce your tax burden

These strategies are all legal so long as they are taken advantage of as intended. However, it isn’t considered ‘tax avoidance’ when you attempt to use these strategies illegally. For instance, you can’t claim a dependent on your taxes with the intention of receiving a tax break if you do not actually have a qualifying dependent. Similarly, you cannot claim a business deduction if the expense was personal.

What is Tax Evasion?

Tax evasion is attempting to avoid paying your fair share of taxes utilizing illegal tactics. Section 7201 of the U.S. Internal Revenue Code goes over the meaning of tax evasion in two different contexts. One type of tax evasion happens when the taxpayer willfully attempts to evade or defeat a tax assessment. The second type happens when the taxpayer intentionally and willfully attempts to evade or defeat the payment of a tax.

One of the main things that separates tax evasion from tax avoidance is the willfulness of the behavior. Sometimes, taxpayers make honest mistakes. In these cases, their actions wouldn’t be considered tax evasion.

Criminal Penalties for Tax Evasion

The punishment for tax evasion is determined based on your unique circumstances. A judge will utilize federal sentencing guidelines along with the facts surrounding your tax evasion actions to come up with a reasonable sentence that reflects the severity of the crime.

They’ll also consider the taxpayer’s criminal history. In general, the highest sentences are levied when the crime is substantial, the losses to the government are significant, and the person has a history of committing similar offenses.

On average, an individual convicted of tax evasion will spend around 3-5 years behind bars, with the maximum sentence being five years. On top of that, you’re likely to face a financial criminal tax evasion penalty. Depending on the extent of the evasion, you could face up to $100,000 in fines.

What to Do If You Get Charged With Criminal Tax Evasion

If you get charged with criminal tax evasion, then it’s necessary to immediately get fully informed regarding your charges, tax situation, legal options, possible defense strategies, and the best path forward. In general, the best way to do this is to hire a criminal defense attorney who has experience handling tax evasion charges. The right lawyer will help you determine how to best manage your criminal charges and tax evasion penalties.

Civil Penalties for Tax Fraud

While tax evasion is always considered a crime, it is possible to be charged with tax fraud and only face civil penalties. When you haven’t been filing your returns, you can face a failure-to-file penalty, which is 5% of the tax you owe. This penalty is reoccurring each month and can reach up to 25% of your overall tax burden.

As if that penalty wasn’t steep enough, you’ll also likely face failure-to-pay penalties. This penalty is 0.5% of your overall tax debt each month. It can reach up to 25% as well.

If the IRS asserts a civil fraud penalty, the penalty is 75% of the unpaid tax.

Interest on any unpaid tax debt will continue to build up on your account every month until you fully pay off your balance. If your tax debt balance continues to accrue and you don’t get in touch with the IRS, then more civil consequences could follow. You could get hit with a tax lien, lose some of your Social Security benefits, face wage garnishments, lose your assets, and more.

What to Do if You’re Charged a Civil Tax Fraud Penalty

If you’re facing civil tax fraud penalties, your next step should be to reach out to a tax resolution lawyer who can help you determine your options moving forward. Civil penalties will continue to build up on your account if you don’t address them, and your case could continue to progress until the IRS decides to impose criminal charges against you.

Tax Resolution: How to Get Back in Good Standing With the IRS

If you’re facing tax fraud penalties, then there may be recourse depending on your situation. Your number one goal should be to get back in good standing with the IRS and resolve your tax debt situation. That way, you won’t continue to face the threat of increasing penalties or potential criminal charges. Below, we’ll go over a few of the most common resolutions to help you get back on track with your taxes.

Voluntary Disclosure

The IRS’s Voluntary Disclosure Program lets taxpayers avoid criminal charges for coming forward voluntarily. To qualify, you must reach out to the IRS before the agency contacts you, and you may need to meet other requirements as well. Don’t navigate this program on your own. Instead, consult with a tax attorney to ensure it’s the best option for your situation.

Amending Returns

Depending on the situation, you may be able to make a “back-door disclosure” by amending your returns. Amending is when you refile your returns with the correct information. Again, consult with an attorney to learn all the implications of this process before going down this route.

Payment Plans

Once you’ve dealt with any criminal concerns, you need to make arrangements to pay your tax debt and penalties. The IRS offers many different payment plans for people who owe back taxes. You may qualify to spread out the debt in monthly payments over several years.

Tax Avoidance vs. Evasion: FAQs

Do you have more questions about tax fraud, avoidance, or evasion? Below, we’ll go over some of the most frequently asked questions regarding delinquent taxes and the IRS’s authority.

Is Tax Evasion a Felony?

Yes. Tax evasion is considered a felony offense under 7201 of the Internal Revenue Code. If you get convicted of a felony offense, you will lose certain rights, like the right to vote or possess firearms.

Is Tax Evasion the Same Thing as Tax Fraud?

Tax fraud is a broad category that covers both criminal tax evasion and civil tax fraud.

Will the IRS Charge Me With a Crime or a Civil Offense?

In most cases, the IRS does not want to pursue criminal charges against a taxpayer. The IRS will usually try a variety of other collection efforts first, including penalizing you financially, charging you with a civil offense, garnishing your wages, or filing a tax lien. That said, the IRS will pursue criminal charges if you are being blatant about avoiding your tax obligations and completely disregard their attempts to collect from you.

IRS Tax Fraud Scams: How Can I Tell if the IRS Communication is Legitimate?

One of the most common scams today includes a fake IRS alert about money that you owe to the IRS. If you’ve ever heard about these scams, then it makes sense to be skeptical of any real notice you get from the IRS.

Here’s how to make sure an IRS communication is legitimate. If the notification is a letter, then there should be a notice number or letter number on the form. You can go to to verify the letter with those details. If the notification is over the phone, then you can either hang up and call the official IRS number to confirm everything the first agent said, or you can ask the caller to send a written notice in the mail.

When Should I Consider Getting Tax Help?

You should consider getting help with your tax situation if you’ve received communications from the IRS about suspected tax fraud. You should also reach out to an attorney if you think you’ve committed tax fraud and you’re worried about the IRS finding out. A tax resolution lawyer can help you make a solid decision on how to handle your situation and ensure you remain in good standing with the IRS.

Are You Looking for Tax Resolution Help?

If you’re facing tax problems, then it’s worth your time to determine whether your behaviors have risen to the level of civil or criminal tax fraud. If you get charged with tax evasion, then you could face serious criminal penalties, including imprisonment. Facing civil tax fraud penalties is also a concern since going further into tax debt will make your tax situation worse.

The good news is that our team of tax attorneys is available to help you solve your tax problems. Here at Wiggam Law, our tax resolution attorneys are prepared to help you get fully informed regarding your tax options, obligations, and rights. We’ll help you determine your best path forward and help you work towards getting back in good standing with the IRS.

Are you ready to get started? Then, call us at (404) 233-9800 or fill out our online form to schedule a consultation now to get started on your tax resolution journey.