The first crime created by the Internal Revenue Code is 26 USC § 7201, “attempt to evade or defeat tax.” On the surface, the language of this statute is clear: “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.” But a careful examination of the statute will reveal that it doesn’t merely create one crime but describes a broad range of crimes that violate the statute.
The law criminalizes both attempts to evade assessment and attempts to evade payment of income taxes. Attempts to evade payment involve hiding assets and income in order to avoid paying taxes that the IRS has already assessed. Meanwhile, evading assessment is any act taken to prevent the IRS from assessing taxes that the taxpayer owes. This involves concealing and underreporting income in order to gain a lower tax assessment.
Individuals and businesses typically attempt to evade income taxes by filing false returns. A false return either omits income, claims improper deductions or does both. By under reporting income, taxes are also underpaid. This can be done simply by omitting income or by mischaracterizing it in a way to create a favorable tax treatment. Deductions can be improperly increased either by simply lying outright or by also deliberately miss-categorizing expenses. This is typically done by improperly deducting personal expenses as business expenses.
It’s important to remember that evading assessment requires a willful attempt to evade assessment. A statement that the taxpayer knows is false will obviously fall under the offense, but merely making a mistake when reporting income or deducting expenses is not going to subject a taxpayer to criminal penalties. False statements must be made knowingly and willfully. But this shouldn’t encourage a taxpayer to lie and then plead ignorance. Courts can infer intent based on a taxpayer’s actions and the information available at the time the statements were made.
Filing a false return also violates 26 USC § 7207, prohibiting false statements to the IRS. The important distinction between § 7207 and § 7201 is that this statute merely requires a false statement, not any act to evade taxes. So even if the individual files a false return that doesn’t evade any taxes, he can still be prosecuted for the false statements. Furthermore, this provides the IRS with another means of criminal prosecution if they are unable to prove that the individual deliberately evaded the taxes. Merely proving the knowledge of the false statement is enough to convict under this statute.