Tax Evasion Basics

• Tax evasion laws determine how the government deals with those who perpetrate tax evasion. Laws dealing with tax evasion are found in Chapter 26 of the U.S. Code, which deals with the Internal Revenue Service. According to the U.S. Code, a party that evades or attempts to defeat a tax is "guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution."
  
  

Identification

• There are many activities that can potentially be classified as tax evasion. Any situation where a party intentionally and fraudulently fails to pay taxes can be considered tax evasion. For instance, a person who receives tips or other cash payments for work where income is not withheld for taxes is legally required to report that income on his tax return. The IRS states that some taxpayers make arguments against having to pay tax on constitutional grounds, but such arguments are not supported by judicial decisions. The IRS can conduct audits to attempt to identify perpetrators of tax evasion.
  
  

Effects

• Tax evasion can have many negative effects. Parties that evade taxes deprive the government of tax revenue, which can in turn increase the government's debt and make it more difficult for the government to fund its operations. According to the IRS, tax evasion can "pose a serious threat to tax administration and the American economy." The IRS says that tax evaders "undermine public confidence in the Service's ability to administer the tax laws fairly and effectively."
  
  

Considerations

• Businesses are required to pay employment taxes on the workers they hire. Business can employ a variety of schemes to attempt to avoid employment taxes. According to the IRS, the following are schemes that may result in unlawful tax avoidance: pyramid schemes, filing false payroll tax returns, paying employees in cash and misclassifying worker status. The IRS encourages workers who suspect employers are not properly withholding and submitting taxes to contact them directly.