What Are the Penalties for Tax Evasion?

Federal and state criminal penalties when taxes go unpaid, evaded, or are fraudulent

By S.M. Oliva | Reviewed by Canaan Suitt, J.D. | Last updated on August 5, 2022

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Tax laws are complicated. Everyone makes an occasional mistake when filing an income tax return. And sometimes we have difficulty making on-time tax payments due to a temporary cash flow problem. While such issues will not necessarily land you in trouble with the Internal Revenue Service (IRS) or your state’s Department of Revenue, more serious offenses, such as tax evasion or filing a fraudulent return, and when that happens you need to contact an experienced tax crimes attorney for legal advice.

Federal and State Criminal Penalties for Willfully Evanding or Defeating Taxes

The Internal Revenue Code (26 U.S.C. § 7201) prohibits any willful attempt to “evade or defeat” any federal tax. If convicted of a felony under this section, a person faces up to five years’ imprisonment and hefty fines: Up to $100,000 for an individual and $500,000 for a corporation.

Many state tax laws mirror the federal tax code, and you could face criminal charges at both the federal and state levels for tax evasion or fraud. For example, Colorado law is modeled on the IRC and makes it a Class 6 felony to “willfully” attempt to “evade or defeat” any tax administered by the state. Along those same lines, it’s a Class 5 felony to willfully fail to “collect or truthfully account” for a tax you are legally responsible for remitting to the state, such as sales tax receipts or withholding from employee wages. Fines for these state criminal offenses are the same as the federal ones: $100,000 for an individual and $500,000 for a corporation.

What Does It Mean to “Evade or Defeat” Taxes?

The term “evade or defeat” covers two distinct types of tax crimes.

1. False Information in the Tax Filing

The first is evasion in the assessment of the tax itself. This means filing a tax return that understates your income, thereby creating a “deficiency” in calculating the amount of tax owed. So, if you deliberately fail to report income—legal or otherwise—or claim deductions you are not legally entitled to, you can be prosecuted for tax evasion.

2. Willful Failure to Pay Taxes

Second is evasion of payment. Even if you file a valid tax return, you can still be charged with a crime if you engage in any “affirmative act” designed to avoid paying taxes. We’re not necessarily talking about a situation where you actually lack the ability to pay, but rather a scenario where you attempt to hide assets from the IRS or your state Department of Revenue.

How Much Will Tax Evasion Cost Me?

Even with no criminal prosecution, you still face potential civil penalties for failing to file or pay your taxes on time.

Both the IRS and state tax agencies assess tax penalties and interest from the date a tax becomes due, regardless of when the return is actually filed. For example, the IRS assesses a late filing penalty of 5 percent for each month a return is overdue, and 0.5 percent for each month your tax payment is late (up to 25 percent of the total amount due). Separately, you will owe interest accrued on any late taxes, which is compounded daily based on the current federal short-term rate plus 3 percent.

If you are facing a criminal investigation for tax fraud or evasion, contact a criminal defense attorney specializing in tax crime defense. For help working with the IRS on tax liabilities, navigating civil tax penalties, or related legal issues, reach out to an experienced tax attorney. For more information on this area of law, see our tax overview.

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