Taxes Tax Planning What Is Tax Evasion? By Joshua Wiesenfeld Joshua Wiesenfeld Joshua Wiesenfeld is a financial investigator, certified public accountant (CPA), and certified fraud examiner (CFE) with almost a decade of experience. He writes about taxes and investing and has been published in the Journal of Accountancy and Fraud Magazine. Joshua has a master's of public administration in forensic accounting from John Jay College. learn about our editorial policies Updated on January 24, 2023 Reviewed by David Kindness Fact checked by J.R. Duren In This Article View All In This Article How Tax Evasion Works What Constitutes Tax Evasion? What Are the Penalties for Tax Evasion? Tax Evasion vs. Tax Avoidance Frequently Asked Questions (FAQs) Photo: Emilija Manevska / Getty Images Definition Tax evasion is the willful and illegal failure to pay taxes to the government. Taxpayers found guilty of federal tax evasion are subject to criminal prosecution. Key Takeaways Tax evasion is the illegal and willful failure to pay taxes owed to the U.S. or other federal or state governments.Tax evasion can take the form of failure to pay taxes owed or underpayment of taxes. In either case, the lack of payment must be willful to be punishable by law.Federal tax evaders are subject to investigation by the IRS and prosecution by the Department of Justice. Those found guilty may be subject to significant penalties or jail time.Tax evasion differs from tax avoidance, which is the legal minimization of tax payment. How Tax Evasion Works All U.S. citizens and residents whose income meets a specific threshold are obligated to pay taxes to the IRS. Unscrupulous individuals who seek to pay as little as possible may resort to illegal methods of hiding their income and assets to avoid making these payments. Tax evasion refers to the willful and illegal failure to pay taxes to the federal government. Tax evasion strategies include deliberately underreporting or omitting income, overstating the amount of one’s deductions, keeping two sets of financial records, false accounting entries, claiming personal expenses as business expenses, and hiding income. Note Illegal avoidance is referred to as tax evasion. It is important to be able to distinguish between tax evasion and legal methods of tax minimization. The IRS Criminal Investigation division is tasked with finding these tax cheats and bringing them to justice. Individuals evade taxes both by misreporting their income or failing to pay taxes owed, which can take the form of either underpaying taxes or failing to pay them at all. The common denominators are intent and the use of illegal means to avoid payment. What Constitutes Tax Evasion? In order for the federal government to prosecute tax evasion, it must prove intent. To meet the threshold for intent, the prosecution must prove the following three elements beyond a reasonable doubt: An unpaid tax liability exists An act by the defendant to evade or attempt to evade a tax The defendant possessed the specific intent to evade a known legal duty to pay Tax cheats rely on numerous tactics and the complexity of the U.S. tax code to illegally avoid tax payments. For example, waitstaff might underreport their cash tips and file a fraudulent tax return that reflects a lower income than their actual earnings. As long as the income concealment is willful, this behavior constitutes tax evasion. What Are the Penalties for Tax Evasion? People found guilty of tax evasion pay a steep price for their deception. Tax evaders must pay the taxes owed plus interest, and may be subject to fines of up to $250,000 for individuals ($100,000 for offenses committed before 1985) and $500,000 for corporations and up to five years in prison. In addition, defendants under investigation for tax evasion often face significant legal expenses. Tax Evasion vs. Tax Avoidance Not all tax-minimization strategies are illegal. Legal methods of reducing tax liabilities are called tax avoidance. Individuals may hire tax attorneys or accountants who specialize in leveraging the U.S. tax code to their clients’ benefit. People also legally minimize their taxes through mechanisms like charitable contributions and tax-deferred retirement accounts. Frequently Asked Questions (FAQs) How do you report tax evasion? If you suspect that a person or a business may not be paying taxes they're due to pay, you can report the tax evasion to the IRS. You would need to fill Form 3949-A— Information Referral. The IRS keeps the identity of those who report tax frauds confidential, and in some cases, reporting tax fraud may also lead to a reward. What is the difference between tax avoidance and tax evasion? Tax avoidance is a legal way to minimize taxes and optimize after-tax income. These include tax deductions, tax credits and income adjustments. Meanwhile, tax evasion is the illegal and willful failure to report taxable income or pay taxes owed to the U.S. or other federal or state governments. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Who Should File a Tax Return." IRS. "The Difference Between Tax Avoidance and Tax Evasion." Page 1. IRS. "Criminal Investigation (CI) At-a-Glance." IRS. "Tax Crimes Handbook," Page 19. Cornell Law School Legal Information Institute. "Tax Evasion." IRS. "Tax Crimes Handbook." Page 2. IRS. "How Do You Report Suspected Tax Fraud Activity?" IRS. "The Difference Between Tax Avoidance and Tax Evasion."