The Differences Between Tax Avoidance and Evasion

There is a wide variety of ways to “evade” taxes, perhaps limited only by human ingenuity. Fortunately, the government has a powerful tool to address taxpayers the government believes are skipping out on the civic responsibility to pay taxes: the “evasion” statute. The language of the statute itself is broad and the courts have also interpreted the statute broadly. It could be said that the statute, and its interpretation, necessarily have to be broad to be able to address the wide assortment of evasions and schemes. The government wields the evasion statute in concert with other Internal Revenue Code criminal statutes to prosecute unscrupulous taxpayers. The general evasion statute is cited below.

“Any person who willfully attempts 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 imprisoned not more than 5 years

Or fined not more than $250,000 for individuals ($500,000 for corporations)

Or both, together with the costs of prosecution.”

The statute can result in hefty penalties, if violation is shown. To show an evasion offense, the government must prove the following elements:

1. an additional tax due and owing

2. an attempt to evade or defeat any tax, or the payment thereof

3. willfulness.

Avoidance versus Evasion

No taxpayer is required to pay more taxes than the law requires—taxpayer can use every available legal tool to avoid payment of taxes. The key is to make sure that avoidance does not turn into evasion. The IRM quote below describes the fine line between avoidance and evasion.

“Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He/she shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are. For example, the creation of a bona fide partnership to reduce the tax liability of a business by dividing the income among several individual partners is tax avoidance. However, the facts of a particular investigation may show that an alleged partnership was not, in fact, established and that one or more of the alleged partners secretly returned his/her share of the profits to the real owner of the business, who, in turn, did not report this income. This would be an instance of attempted evasion.” IRM 9.1.3.3.2.1 (05-15-2008) (emphasis added).