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Tax Evasion and Tax Avoidance: One is a Crime, One is Not

Both terms sound like something that’s not exactly on the level, but only tax evasion is illegal under the United States Code. Tax avoidance, on the other hand, refers to completely legitimate means of reducing one’s tax bill, including using deductions and credits.

Definition of Tax Evasion

Sec. 7201 of the U.S. Code lays out tax evasion thusly:

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.

One way to delineate tax evasion and avoidance is by remembering that tax avoidance mainly involves reducing one’s taxable income through deductions. Again, this is permissible and has been recognized as legal by federal and state case law. Countless financial professionals make it their business to help taxpayers pay as little tax as possible.

What Does Tax Evasion Look Like?

There are numerous methods taxpayers use to try to get away with not paying taxes, including:

  • Not reporting income or underreporting income
  • Claiming deductions or credits they’re not actually eligible for
  • Not paying or underpaying tax debts
  • Failing to withhold payroll taxes
  • Failing to disburse payroll taxes after withholding
  • Not reporting “under-the-table” payments to workers
  • Overstating charitable contributions

How is Tax Evasion Investigated?

Tax evasion is often discovered through IRS audits. The IRS is usually restricted to auditing a taxpayer’s tax returns going back three years, but sometimes the agency can look at returns from as long as six years prior. An important note here is that the IRS does not have the authority to prosecute criminal cases-only the authority to investigate noncompliance. The two main ways the IRS investigates alleged tax evasion are scrutinizing a taxpayer’s cash expenditures versus his or her net worth and looking at a taxpayer’s deposits compared to his or her reported income.

Potential Penalties

As mentioned above, one could be sentenced up to five years in prison for tax evasion and be forced to pay a $100,000 fine. The average prison sentence for tax evasion is around three years. Claiming ignorance of one or more tax provisions may not be sufficient to avoid a conviction for tax evasion or fraud.

Attorney Ivette Petkovich routinely defends clients involved in high-stakes, complex white-collar crimes. Attorney Petkovich brings invaluable experience from the Miami-Dade State Attorney’s Office, so she understands how prosecutors operate. We can be your guide during this stressful time. Call us at (305) 358-8003 to set up a time to speak today.


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