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In Focus: Another Look Tax Evasion Penalties

As many individuals and business owners can attest, navigating the tax laws can be complicated. While simple mistakes in an income tax filing can lead to financial penalties, those who intentionally evade paying taxes may face criminal charges. For this reason, it is crucial to meet your tax obligations. This article is a follow up discussion on the consequences of tax evasion which this blog touched on last month.

Tax Evasion 101

Again, the first thing to be aware of is this difference between tax avoidance and tax evasion. In short, individuals and businesses can lawfully mitigate their tax liabilities in a manner that has been approved by state and federal tax authorities. This includes taking legitimate tax deductions or tax credits.

Tax evasion, on the other hand, is illegal. In short, this involves the deliberate concealment or misinterpretation assets in order to avoid paying taxes. This includes:

  • Failing to file tax returns
  • Understating income and assets
  • Overstating tax deductions
  • Filing false tax returns
  • Sales tax fraud
  • Failure to pay employment withholding taxes

State and Federal Tax Evasion Penalties

The Internal Revenue Service (IRS) and state authorities have broad powers to enforce applicable tax laws. With California taxes, there are three agencies that collect taxes and enforce the state’s tax laws:

  • The Franchise Tax Board – Collects income taxes and investigates cases of  income tax evasion
  • The Board of Equalization – Collects sales and use taxes and investigates businesses that engage in tax fraud
  • The Employment Development Department – Distributes employment benefits such as unemployment and disability benefits and investigates employers who fail to pay taxes that fund these benefits

A conviction for tax evasion at the state level can have serious consequences, depending on whether it is a civil or criminal offense and the amount of the unpaid taxes. Ultimately, you may be ordered to pay a fine of up to $20,000 by the relevant tax authority and also face a prison sentence of up to one year in jail.

Similarly, both civil and criminal penalties apply for tax evasion at the federal level. This includes fines up to $100,000, or $500,000 in the case of a corporation, and up to five years in federal prison, or both. The IRS can also assess additional penalties. This includes adding monetary penalties to the tax bill, or placing a lien on real property. In more serious cases the IRS may go as far as to implement a tax levy and seize income, financial accounts, and property.

Possible Defenses Against Tax Evasion Charges

Depending on the circumstances, it may be possible to show that you did not intend to defraud the government, but simply miscalculated the taxes. In some cases, it may also be possible to negotiate a tax resolution with the state tax authorities or the IRS. In any event, you are well advised to seek the advice and counsel of an experienced tax attorney who can devise a successful defense strategy. At the same time, it’s best to be proactive and consult with attorney on how to lawfully mitigate your tax liabilities.

Posted in: Tax Controversy

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