Is tax evasion a felony?

Federal tax evasion is willfully attempting, in any manner, to evade or defeat a tax or the payment of a tax. The law that covers it is 26 U.S.C. § 7201.^1,2

The statute covers an attempt to evade a tax imposed by the Internal Revenue Code or to evade paying it. The penalties are in addition to any other penalties the law provides.

Tax evasion takes more than failing to file or pay. The Justice Department's Criminal Tax Manual says "there must be an affirmative act" to satisfy the requirements of the Section 7201 felony.³

The manual gives concealing assets or using nominees as examples of an affirmative attempt to evade payment of a tax.

Willfulness means a "voluntary, intentional violation of a known legal duty," according to the Justice Department's Criminal Tax Manual. Negligence or an honest mistake is not enough.^2,3

The manual says the government must show the person acted purposefully, as distinguished from inadvertently, negligently or mistakenly. It also says the willfulness required is the same whether the charge is the felony or the misdemeanor.

Legally reducing your taxes, called tax avoidance, is not a crime. According to the IRS, evasion involves deceit, concealment or an attempt to make things look different than they are.²

The IRS manual describes a person who avoids tax as someone who does not conceal or misrepresent, and who makes full disclosure after shaping events to reduce tax. Evasion, by contrast, involves some attempt to color or obscure events. Its example of evasion is a sham partnership in which a partner secretly returns profits to the real owner, who does not report the income.

The government does not have to assess the tax before bringing a criminal case. The Criminal Tax Manual says an administrative assessment is not necessary before a criminal prosecution may be instituted.³

California

California: willfully failing to file a return, or filing a false return, with intent to evade state income or franchise tax is punishable under Revenue and Taxation Code § 19706 by up to one year in county jail or by state prison, a fine of up to $20,000, or both. Under § 19701, certain tax violations are a misdemeanor.^4,5,6

Because § 19706 allows either county jail or state prison, it can be charged as a felony or a misdemeanor under California Penal Code § 17. Section 19701 covers, among other things, willfully failing to pay tax due and, with or without intent to evade, repeatedly failing to file over two years or more, or filing false returns, resulting in an estimated delinquent tax liability of at least $15,000. A person convicted under § 19701 can be fined up to $5,000, jailed up to one year, or both.

New York

New York: criminal tax fraud in the fifth degree is a class A misdemeanor. It becomes a class E felony when the person intends to evade tax and underpays by more than $3,000 within a period of up to one year, and the grade rises as the amount grows.^{7,8,9,10,11,12,13}

Under Tax Law Article 37, a tax fraud act includes willfully failing to file a required return or knowingly filing a return with materially false information. Fourth degree (over $3,000) is a class E felony, third degree (over $10,000) is a class D felony, second degree (over $50,000) is a class C felony, and first degree (over $1 million) is a class B felony. Separately, § 1808 makes failing to file a personal income tax return for three straight years, with intent to evade and with unpaid tax each year, a class E felony.

Virginia

Virginia: willfully failing or refusing to file a state income tax return is a Class 1 misdemeanor. Making a false statement in a return with intent to defraud the Commonwealth is a Class 6 felony.¹⁴

A prosecution under this section must begin within five years after the offense.

The two main federal tax crimes in this area are § 7201 (evasion, a felony) and § 7203 (willful failure to file or pay, generally a misdemeanor).^1,2,15

Maximum penalties for an individual: tax evasion under § 7201 carries up to $100,000 and five years. Willful failure to file or pay under § 7203 carries up to $25,000 and one year.^1,2,15

The statutes set a $100,000 fine for tax evasion and $25,000 for failing to file or pay. The IRS manual notes that 18 U.S.C. § 3571 raises the maximum fines to $250,000 for tax evasion and $100,000 for the misdemeanor under § 7203, for individuals.

IRS Criminal Investigation looks into possible violations of the tax code and refers cases to the Department of Justice for prosecution. A tax case is sent to the Justice Department's Tax Division, and other cases go to a U.S. Attorney.^16,17

The IRS says its agents obtain evidence by interviewing witnesses, subpoenaing bank records, executing search warrants and reviewing financial data, and that a case must pass several levels of review before a prosecution recommendation is made. Its listed focus areas include abusive return preparers, employment tax evasion and general fraud investigations.

Willfully failing to file a return, pay a tax, keep required records or supply required information is a federal misdemeanor under 26 U.S.C. § 7203.^2,15

The punishment is a fine of up to $25,000 ($100,000 for a corporation), up to one year in prison, or both, plus the costs of prosecution.

Section 7203 does not apply to a person who fails to pay estimated tax when no addition to tax under section 6654 or 6655 applies to that failure.¹⁵

The difference between the misdemeanor and the felony is usually what the person did. Willful failure to file or pay under § 7203 is the misdemeanor, while the § 7201 felony requires an affirmative act to evade or defeat the tax.^1,2,3,15

Tax evasion under 26 U.S.C. § 7201 is a felony. The punishment for an individual is a fine of up to $100,000, up to five years in prison, or both, plus the costs of prosecution.^1,2

For a corporation, the fine can be up to $500,000.

Signing a tax return or other document under penalty of perjury that you do not believe is true on a material matter is a federal felony under 26 U.S.C. § 7206(1). The punishment is up to three years in prison, a fine of up to $100,000 ($500,000 for a corporation), or both.^2,18

The offense must be willful. According to the IRS manual, it can apply even when the government cannot prove a tax deficiency, for example when a partnership return is false. The IRS manual notes that § 7206 is also used when it is hard to prove how much tax was owed or when the amount evaded is small compared with total tax liability.

Willfully helping prepare or present a false tax return or other document is also a federal felony under 26 U.S.C. § 7206(2). It applies whether or not the person who files the document knows it is false.^2,18

The IRS manual says actual preparation of the false return is not necessary for a conviction. The punishment is the same as for § 7206(1): up to three years in prison, a fine of up to $100,000 ($500,000 for a corporation), or both.

One failure-to-file offense is a felony. A willful violation of section 6050I, the cash-reporting rule, is punished under § 7203 as a felony with up to five years in prison instead of one year.^2,15

The text of § 7203 says that for a willful violation of section 6050I, the first sentence of the section is applied by substituting "felony" for "misdemeanor" and "5 years" for "1 year."