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Evasion of Tax Assessment vs Evasion of Payment

Posted by Dmitry Gorin | May 01, 2024

Tax evasion, a violation under 26 U.S.C. 7201, is a serious federal offense in the United States. It involves deliberately misrepresenting or concealing information to reduce tax liability

Tax evasion can take many forms, but it primarily falls into two categories: evasion of assessment and payment. Both types of evasion are punishable under federal law but involve different actions and legal nuances. 

Evasion of Tax Assessment vs Evasion of Payment

26 U.S. Code 7201 attempt to evade or defeat tax says, “Any person who willfully attempts in any manner 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 fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution.

The United States income tax system is based on voluntary compliance. Under this system, it is the taxpayer's responsibility to report all income. Tax evasion is illegal. 

People try to evade paying taxes by failing to report all or some of their income. Sometimes, people do not report all the tips they collect or the money they earn through other activities.

Such money-making activities are part of the underground economy, which exists to avoid paying taxes. If taxpayers fail to pay what officials say they owe, the IRS can assess a penalty and collect the back taxes. 

In contrast, tax avoidance is legal. IRS regulations allow eligible taxpayers to claim certain deductions, credits, and adjustments to income. For example, some homeowners can claim an interest deduction they pay on a home mortgage. 

Working parents may be able to claim a credit for child-care expenses. There are also deductions based on the number of family members, but the taxpayer must prove that they qualify.

What is the Definition of Tax Evasion?

26 U.S.C. 7201 defines tax evasion as the willful attempt to evade or defeat any tax imposed by federal law or the payment thereof. 

The statute encompasses various forms of deceitful behavior, including understating income, inflating deductions, and hiding funds. Under this statute, the government must prove three elements to convict an individual:

  • The Existence of a Tax Deficiency: There must be a tax owed to the government that has not been paid.
  • Willfulness: The individual must have intentionally attempted to evade a tax law.
  • An Affirmative Act: The individual must have taken an explicit action to evade taxes.

What is Evasion of Assessment?

Evasion of assessment occurs when an individual or entity intentionally provides false information to the Internal Revenue Service (IRS) to lower their tax assessment. 

For example, a business owner who fails to report cash transactions or an individual who does not declare income earned from freelance work may be guilty of evasion of assessment. Specific examples of evasion of assessment may include:

  • Underreporting Income: Not reporting part or all of the income earned.
  • Inflating Deductions: Claiming deductions for expenses that were not incurred or are not legally deductible.
  • Keeping Double Books: Maintaining one set of books for business and another for tax purposes.
  • Making False Statements: Providing false information to the IRS during audits.

When you're accused of evasion of assessment, the prosecution must demonstrate that the taxpayer's actions directly prevented the IRS from assessing the correct amount of tax due. The focus is on the behavior that led to the incorrect or incomplete tax assessment.

What is Evasion of Payment?

On the other hand, evasion of payment occurs after the tax liability has been assessed and the taxpayer attempts to avoid payment. An example would be an individual who, knowing they owe taxes, transfers their savings to an offshore account to avoid IRS collection efforts. Common evasion of payment tactics include:

  • Hiding Assets: Transferring assets to family members or into hidden accounts to shield them from IRS collection efforts.
  • Dealing in Cash: Avoiding bank transactions to make income and assets less traceable.
  • Creating False Debt: Fabricating obligations or expenses to claim inability to pay the assessed tax.

For evasion of payment, the government must prove that you undertook specific steps to avoid paying taxes you knew were due. The focus is on obstructing the IRS's ability to collect rather than on the initial assessment process.

What Are the Related Federal Laws?

26 U.S. Code Chapter 75 Subchapter A Part I General Provisions has several federal laws related to tax evasion, including the following: 

  • 26 U.S.C. 7201 - Attempt to evade or defeat tax,
  • 26 U.S.C. 7202 - Willful failure to collect or pay overtax,
  • 26 U.S.C. 7203 - Willful failure to file a return, supply information, or pay tax,
  • 26 U.S.C. 7204 - Fraudulent statement or failure to make a statement to employees,
  • 26 U.S.C. 7205 - Fraudulent withholding exemption certificate or failure to supply information,
  • 26 U.S.C. 7206 - Fraud and false statements,
  • 26 U.S.C. 7207 - Fraudulent returns, statements, or other documents,
  • 26 U.S.C. 7210 - Failure to obey summons,
  • 26 U.S.C. 7211 - False statements to purchasers or lessees relating to tax,
  • 26 U.S.C. 7212 - Attempts to interfere with the administration of Internal Revenue laws,
  • 26 U.S.C. 7213 - Unauthorized disclosure of information,
  • 26 U.S.C. 7213A - Unauthorized inspection of returns or return information,
  • 26 U.S.C. 7214 - Offenses by officers and employees of the United States,
  • 26 U.S.C. 7215 - Offenses concerning collected taxes,
  • 26 U.S.C. 7216 - Disclosure or use of information by preparers of returns,
  • 26 U.S.C. 7217 - Prohibition on executive branch influence over taxpayer audits and other investigations.

What are the Possible Penalties?

Being convicted of tax evasion (for evasion of assessment or payment) comes with considerable penalties. The specific penalties imposed often depend on the nature of the evasion, the amount of tax evaded, and the taxpayer's history. If you're convicted, you could face the following:

  •  Up to five years imprisonment and
  • Up to $100,000 in fines ($500,000 for corporations); plus, you'll be required to cover the costs of prosecution.

And, of course, you'll still owe the unpaid back taxes, plus interest and penalties.

What are the Common Defenses?

While facing tax evasion charges can be daunting and frightening, a skilled federal criminal defense attorney can implement numerous strategies to fight the charges. These include, but are not limited to, the following:

  • Lack of Intent: A key element in tax evasion charges is the intent to evade taxes, so your attorney may present evidence to show you had no intent to defraud the government. This might involve proving that any misreporting was due to negligence or misunderstanding rather than a deliberate attempt to evade taxes.
  • Challenging the Accuracy of IRS Claims: Challenging the IRS's calculations and assumptions can be a viable defense in cases of alleged assessment evasion.
  • Financial Hardship: In cases of payment evasion, showing that non-payment was due to genuine financial hardship, not willful deceit, might mitigate penalties, if not erase them completely.

Contact our law firm for more information. Eisner Gorin LLP has offices in Los Angeles, California.

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About the Author

Dmitry Gorin

Dmitry Gorin is a licensed attorney, who has been involved in criminal trial work and pretrial litigation since 1994. Before becoming partner in Eisner Gorin LLP, Mr. Gorin was a Senior Deputy District Attorney in Los Angeles Courts for more than ten years. As a criminal tri...

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