What Is Considered Tax Evasion?

businessman with a lot of cash

In the tax industry when clients first start dealing with the IRS there is always the fear and question “Am I going to jail?”. The truth is that very few people go to jail for tax evasion.

The IRS mainly targets people who understate what they owe by either under-reporting income or misreport credits or deductions on their tax returns. They do not typically go after, criminally at least, people who just cannot pay their taxes.

 

The Definition of Tax Evasion

Under Federal law of the United States of America, tax evasion is the purposeful illegal attempt of a taxpayer to evade assessment or payment of a tax imposed by Federal Law. Conviction of tax evasion may result in fines and imprisonment.  The biggest definer of tax evasion is intent.

Innocent mistakes on your tax return do not officially label you a tax evader. Tax evasion is when you intend to evade taxes.

A genuine good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity is a defense to the charge of tax evasion. A belief that the federal income tax is invalid or unconstitutional is not a misunderstanding caused by the complexity of the law.

 

How Does the IRS Handle Tax Evasion?

As seen on the IRS website, the Internal Revenue Service-Criminal division conducts criminal investigations regarding alleged violations of the Internal Revenue Code, the Bank Secrecy Act, and various money laundering statutes. The findings of these investigations are then referred to the Department of Justice for recommended prosecutions. These criminal investigations can be initiated by the IRS when a revenue agent (auditor) or revenue officer(collections) detects possible fraud.

The IRS also receives tips from the public as well as from law enforcement and United States Attorney offices across the country.

 

Famous Cases of Tax Evasion & Lessons Learned

Probably the most famous time that outside law enforcement reached out to the IRS during an ongoing investigation was in 1931 when the IRS went after Al Capone.  Capone was alleged to be the mastermind behind 30 deaths and government agents had spent years trying to take him down, but he always avoided conviction. On 17 October 1931, he was found guilty of tax evasion and sentenced to 11 years in prison. Before this, he was quoted “They can’t collect legal taxes on illegal money.” 

Capone had been living a lavish lifestyle and was worth up to $100 million yet he had never filed a tax return. Agents began gathering information by following the money and proving that Capone had made millions of dollars of income that was never taxed. He was indicted on 22 counts of federal income tax evasion. Capone reached a plea deal where he would only get 2 years, but the judge refused to accept the deal and the case went to trial where he was sentenced to 11 years in prison, fined $50,00, charged court costs, and ordered to pay back $215,000 in back taxes.

Another way the IRS begins an investigation is when there is reported income and a taxpayer fails to file their tax returns every year. When an employer sends out income forms, W-2 or 1099, to their employees or contracted individuals they also send these to the IRS. So, the IRS is very aware of the income a person is making when they are employed. 

A lot of these W-2 employees who fail to file either has exceptionally low withholdings or go exempt from their employer. With a self-employed person unless they set up estimated payments throughout the year with the IRS no taxes are being turned over throughout the year. This type of taxpayer is not only not filing their taxes but they are also not paying their taxes. This will raise red flags with the IRS and at some point, they will begin filing these taxes on behalf of the taxpayer. These are called substitutes for returns. If the amounts owed are substantial, this is where the IRS may pursue criminal charges.

A case of this nature that a lot have heard about was with actor Wesley Snipes. In 2006 Snipes was indicted on charges of attempting to claim nearly $12 million in fraudulent tax refunds and not filing any tax returns for several years. In the court proceedings, IRS agent Steward Stich testified that Snipes earned almost $40 million in the years 1999 and 2004 and failed to file tax returns or have any money withheld for taxes on any of that income. He also alleged that Snipes also tried to file returns to have taxes refunded to him from years before that in the amount of almost $12 million. 

During his defense, Snipes tried to claim that the IRS was an illegitimate government agency. He also blamed bad tax advisors and challenged his actual residency. None of these excuses worked on the charges of failure to file his tax returns. He was acquitted of tax fraud but was sentenced to up to three years in prison on the charges of failure to file.

After a person serves prison time for an outstanding tax debt the debt is not cleared. They still owe the money and are required to pay it back. Once released Snipes claimed to not have the money to pay it back and filed for an Offer in Compromise.  Everyone has heard the commercials that you can settle your debts for less through the different programs. While these programs do exist and I will discuss them in a later article, they are all “hardship” and “inability to pay” driven. Snipes learned this the hard way as his bid for a reduction was denied. When this failed Snipes even went one step further and petitioned the tax courts with an appeal to this decision. This case dragged on for years and his offer was ultimately rejected.

Another type of tax evasion, which is probably the most common, is when one receives cash income and does not report it to the IRS. All earned income is required to be reported to the IRS, so when one leaves this off a tax filing it would be considered tax evasion. A lot of people call this “working under the table.” This nonreporting of income is very illegal. Some industries where this type of tax evasion is common are barbershops, hairdressers, and the hospitality industry.

There was a major case of this nature recently with MTV reality celebrity Mike “Situation” Sorrentino. In the tax year of 2011, Sorrentino had earned additional cash income on top of his reported income. He not only failed to report this income, but he also admitted to taking certain actions to conceal some of this income to avoid paying taxes. He had deposited this money into his accounts in small deposits less than $10,000 to avoid the IRS becoming aware of them. Sorrentino was sentenced to eight months in prison and forced to pay $123,913 in restitution and a criminal fine of $10,000.

With the IRS and its depleted budget, many of these types of cases go undetected. Studies are showing that many wealthy tax evaders are going undetected and that there is substantial tax evasion at the top. New proposals to hike the budget of the IRS may provide for additional IRS staff for audits of these situations; they may help close what they call the tax gap.

 

Tax Evasion Through Child Tax Credits

Another common practice of tax evasion that has been highly regulated as of late is the claiming of dependents for the child tax credit or the earned income credit. Many people use the social security numbers of people’s children who they may know or even relatives that they do not support so they can receive refunds on their tax returns from the different credits.

Because of the rampant fraud in the use of these credits, the IRS admits that an audit of a return using one of these credits is 4 times more likely than one not.

 

What Does the IRS Typically Do In Cases of Tax Evasion?

Now, these examples that I mentioned had harsh consequences for their actions. They do not typically go after, criminally at least, people who just cannot pay their taxes. These were all high-profile cases of celebrities that had huge media attention. It can be said that they were made an example of. 

In most cases of tax evasion, the IRS simply goes in and fixes the errors and hits the taxpayer with fines of a percentage of the tax debt. These fines can be substantial and if a taxpayer does not comply with collections, then the IRS can pursue enforced collections.

In some cases, in these audits and examinations, a taxpayer can hire the correct representation to refile the tax years correctly like they should have been done the 1st time to reduce what the IRS is saying that they owe.

In conclusion, once the debt is in collections the taxpayer does have rights and a lot of other programs available if they cannot pay the debt off. These I will discuss in future articles. If you are dealing with this situation, it is well worth the investment of hiring a licensed tax professional to get involved.

The best-suited representative for these types of cases is the Enrolled Agent. They are recognized by the IRS as the highest level of representation and are typically former IRS agents that know the in and outs of this process.

 

FAQs About Stimulus Checks and Taxes

an example of a stimulus check

Your taxes determine whether you get a stimulus check or not, even if you do not file at all. Below are some commonly asked questions about stimulus checks and how they may or may not affect your tax return.

 

What do I need to qualify for a stimulus (or economic income payment) check?

You need to have a valid SSN (Social security Number) and not be a dependent of somebody else. It is also paramount that you meet the following income eligibility requirements to receive 100% payment:

  • Joint tax filers (income up to $150,000).
  • Head of households (income up to $112,500).
  • Individual tax filers (income up to $75,000)

If the AGI (adjusted gross income) exceeds the applicable threshold, the total payment amount is reduced by 5%.

 

Who is NOT eligible for the stimulus checks?

Joint filers with no offspring and income more than $198,000, and single filers earning over $99,000.

 

How much money will I get from a stimulus check?

The first stimulus check was $1200, and the second was $600. Also, taxpayers that have filed their 2019 tax returns will get up to $1,200 (married couples) and up to $600 for every eligible child or up to $600 (individual filers) automatically.

 

Will I need to submit an application to receive the stimulus check?

No, this is not required. The process is automated for those that qualify. The IRS will calculate your payment after using your tax return information. You will then receive the payment on the same bank account from the tax return. In any other case, the IRS will send you an Economic Income Payment (EIP) card, which is a type of debit card, using the most recent mailing address filed with them.

 

The bank account on my 2019 tax return is closed/inactive. Where will I receive the payment?

You will need to file your 2020 tax returns electronically. Then, claim the Recovery Rebate Credit on your tax return.

 

I have not received my payment. What should I do?

You can claim the Recovery Rebate Credit when filing your 2020 income taxes. Then, you will get a voucher for your 2020 tax return as a credit, saying that your stimulus is part of your tax return refund money.

 

How are vouchers different from checks?

The voucher makes the stimulus money part of your refund, whereas checks go to everybody even if they owed the IRS money. This also means that the IRS can keep the voucher if you owe them tax money, as it (the voucher) is part of the return.

 

What if I have received the wrong amount?

Again, initiate the procedure to get the Recovery Rebate Credit when filing your 2020 income taxes.

 

I don’t have a bank account. How will I receive the payment?

You can expect your payment to be made by check or a prepaid debit card. The IRS will use the mail address on your file (the most recent tax return) to send you the payment. For more information about your EIP card or report a stolen/missing EIP card, you can visit this link.

 

I am not required to file a tax return. Will I get any money?

Yes. Those not required to file a tax return will receive payments generated by the IRS, provided they have used the RRB-1099 or the SSA-1099 form before November 2020. Otherwise, the Recovery Rebate Credit can be claimed on your 2020 tax return (line 30).

 

When are stimulus payments made?

Stimulus payments started in late December 2020. Those that have direct deposit details on file will be paid first. Mailed payments (debit card and checks) are the next in line. You may use this link to check the status of your payment. If you have NOT provided the IRS with your banking information, visit this online portal so you can do whatever necessary to receive immediate payments rather than checks in the mail.

 

I have missed the deadline to file a claim for the 1st stimulus check? Now what?

Non-filers that have missed the November 21st deadline to provide their personal details to claim the 1st stimulus check can claim the additional sum after filing their 2020 tax return.

 

Is my stimulus payment taxable?

According to the IRS, taxpayers are not required to owe tax on their stimulus payments, as they (the payments) are not regarded as income. This also means that your refund will NOT be reduced or otherwise affected by the payment. Plus, the stimulus payments will NOT raise the due sum when you file your 2020 tax return (or your 2021 tax return). Finally, stimulus payments will NOT have any impact on your income for purposes of determining your eligibility for benefit programs or federal government assistance programs.

 

Is a stimulus payment a tax credit?

Technically, yes. However, it is not your average tax credit as it won’t reduce your future tax refund or generate a larger tax bill when you file your tax return the following year. Here is some more explaining. In the tax world, a tax credit lowers your tax bill. So, if you owe $1,700 in federal income taxes and receive a $900 tax credit, your total due amount drops to $800 ($1,700-$900). Now, a refundable tax credit can turn your tax bill into a tax refund. Therefore, if you owe $1,500 in taxes and have a refundable tax credit of $1,900, you will receive a $400 tax refund.

Given that you do not wait to receive money from the credit in 2022 (when you file your 2021 tax return) but are getting sums to a refundable tax credit now in the form of a stimulus payment (the 3rd one) instead, you are actually receiving an advanced refundable tax credit.

 

The stimulus payment was more than I was allowed. What happens now?

Any adjustments to your 2020 tax returns rebate are in your favor. If, for instance, the IRS has calculated your stimulus payment based on your 2019 tax return (you had a lower income then), but  your income is higher this year, then you won’t need to pay the credit back.

 

I owe federal taxes. Will the IRS use my stimulus check money to cover them?

If you have past-due child support, the IRS will NOT use your stimulus payment to cover it. This also means that your stimulus payment can NOT be garnished by debt collectors. This applies to the second check, though.

Nevertheless, if you are claiming your missing stimulus check on your tax returns, you are no longer protected from the Consolidated Appropriations Act. In other words, the IRS can, in this case, garnish your stimulus check for unpaid taxes.

So, all in all, if you have qualified for EIP and have not received your full payment (and have outstanding debts), the IRS will withhold some or all of your unpaid stimulus payment to offset those debts.

 

I have unemployment income. Do I pay taxes on it?

According to the new guidelines, up to $10,200 is tax-exempt. So, if you collected unemployment in 2020, you could be exempt from paying taxes on it if you meet the criteria of the economic impact/stimulus. For married individuals filing jointly, the adjusted gross income is set at $150K while for singles, it is $75K.

 

How much money will I get from the 3rd stimulus, based on my 2020 taxes? Will they affect the amount I will receive?

If your situation has changed dramatically between 2019 and 2020, you may receive the full amount of the third stimulus check, which is based on your 2020 or 2019 taxes (depending on what the IRS has on file when it determines the amount you will receive). However, tax season could affect your 3rd check, as you may need to be patient until next year (2022) to claim the difference in the taxes. Truth be told, things are quite complicated with the third stimulus at the moment, considering that the tax season merges with the timeline for sending the check.

 

What if I file for an extension or wait until the April 15 tax due date?

Having to pay owed taxes will NOT be postponed if you file for an extension. Doing this will delay your stimulus payment. In general, it is advised to file your taxes sooner than the due date for your 2020 tax returns as it could speed up the delivery of any tax refund you might be eligible for. On top of that, you will help boost the process of getting any missing stimulus money by weeks or even months.

 

I have already filed my 2020 tax return. How will the government rectify my tax bills?

Unfortunately, the current landscape is blurry in regards to this particular situation. It is still unclear how the IRS will address this issue, at least at the moment of this writing.

 

I have received a stimulus payment on behalf of a family member that has deceased.  What do I do?

If you filed jointly with your spouse, and they have passed away before January 1, 2020, then the IRS will not issue a payment for the deceased spouse. This means that you won’t get the $600 payment for them. However, you will continue to receive up to $600 for you and an additional $600 for any qualifying offspring (provided you meet all the other eligibility criteria).