Is Tax Evasion a Felony? Charges, Penalties, and Legal Implications

Tax evasion is a serious offense involving the deliberate avoidance of paying taxes owed to the government. Unlike mistakes or miscalculations, it requires intentional deception, such as underreporting income, inflating deductions, or hiding money in offshore accounts. Governments prosecute tax evasion aggressively because it undermines public funding and fairness in the tax system.

Criminal Classification

Tax evasion is a criminal offense under federal and state laws, with severity depending on the specifics of each case. The Internal Revenue Code Section 7201 defines it as a willful attempt to evade or defeat any tax, making it one of the most serious tax-related crimes. This distinguishes it from civil tax violations, which typically result in financial penalties rather than criminal charges.

The key difference between civil and criminal tax violations is intent. Civil penalties apply to negligence or unintentional errors, such as misreporting income due to misunderstanding tax laws. However, deliberate deception—such as falsifying records or concealing assets—can lead to criminal prosecution. The IRS Criminal Investigation division, working with the Department of Justice, handles these cases.

Federal tax evasion charges fall under Title 26 of the U.S. Code, but states have their own tax laws. For example, California’s Revenue and Taxation Code Section 19706 criminalizes willful failure to file tax returns or providing false information, with penalties including imprisonment and fines. New York aggressively prosecutes tax evasion, particularly cases involving large sums or fraudulent schemes.

Criteria for Felony Charges

For tax evasion to be a felony, prosecutors must prove willful intent to evade taxes. This goes beyond mistakes or negligence—there must be clear evidence of intentional actions designed to mislead tax authorities. Courts examine patterns of behavior rather than isolated errors, meaning repeated underreporting or concealed offshore accounts can strengthen a felony case.

The amount of tax evaded influences whether felony charges are pursued. While no fixed dollar threshold determines a felony, cases involving hundreds of thousands or millions of dollars are more likely to face federal prosecution. The complexity of the scheme also matters—using shell companies or falsified business expenses indicates deliberate fraud, increasing the likelihood of felony charges.

The statute of limitations for tax evasion is generally six years under 26 U.S. Code 6531. However, if fraudulent actions continue over multiple years, the clock resets with each new offense, making long-running schemes prosecutable beyond the initial act of evasion.

Penalties

Tax evasion carries serious consequences, including fines, imprisonment, and restitution, depending on the severity of the offense and the amount of tax evaded.

Monetary Fines

Individuals convicted of felony tax evasion under 26 U.S. Code 7201 can face fines of up to $100,000, while corporations may be fined up to $500,000. These fines are separate from the taxes owed, meaning offenders must still pay the original tax liability plus interest and additional penalties. The IRS also imposes civil fraud penalties, which can amount to 75% of the unpaid tax under 26 U.S. Code 6663.

For example, if a taxpayer evades $50,000, they could owe an additional $37,500 in civil fraud penalties, plus interest. In cases involving fraudulent refunds or false claims, courts may impose further financial penalties. These fines can escalate quickly, making tax evasion an extremely costly crime.

Imprisonment

A felony tax evasion conviction can result in up to five years in prison under federal law. The length of incarceration depends on factors such as the amount of tax evaded, the complexity of the scheme, and prior offenses. Sentencing guidelines set by the U.S. Sentencing Commission recommend higher sentences for larger tax losses.

For instance, evading more than $550,000 can lead to a recommended sentence of 30 to 37 months, even for first-time offenders. Aggravating factors, such as obstructing an IRS investigation or destroying records, can result in longer sentences. While some offenders receive probation or home confinement, large-scale fraud schemes often lead to significant prison time.

Restitution

Courts frequently order restitution, requiring offenders to repay the government for unpaid taxes. Unlike fines, which serve as punishment, restitution compensates the IRS for lost revenue. Under 18 U.S. Code 3663A, restitution is mandatory in cases involving financial loss to the government.

The amount is typically equal to the unpaid tax liability, including interest and penalties. Courts may structure restitution payments over time, but failure to comply can result in further legal consequences. In some cases, restitution agreements are negotiated in plea deals, allowing defendants to avoid harsher penalties in exchange for full repayment. This financial obligation can persist even after serving a prison sentence.

Court Proceedings

Once federal prosecutors charge an individual or business with tax evasion, the legal process moves through pretrial motions, discovery, and trial preparation. The government must prove beyond a reasonable doubt that the defendant willfully attempted to evade taxes, making intent a central issue in court.

Prosecutors rely on forensic accountants and financial analysts to present evidence, such as discrepancies in tax filings, hidden transactions, or falsified records. Testimony from former accountants, business partners, or financial institutions can further strengthen the case.

The defense typically argues that errors were due to negligence or misunderstanding rather than fraud. Defendants may present expert witnesses, such as tax professionals, to explain financial matters and demonstrate that their reporting was not intentionally deceptive. In some cases, settlement negotiations occur before trial, with defendants agreeing to plea deals that reduce charges in exchange for cooperation or repayment. These agreements can lessen potential sentencing but often include financial penalties and compliance requirements.

Record Implications

A felony tax evasion conviction has lasting consequences beyond fines and imprisonment. Unlike civil tax penalties, which primarily involve financial restitution, a felony conviction becomes a permanent part of a person’s record, affecting employment, financial opportunities, and personal reputation.

Employers often conduct background checks, and a tax fraud conviction can make it difficult to secure jobs in industries requiring financial responsibility, such as banking, accounting, or government positions. Professional licenses for attorneys, accountants, and financial advisors may be revoked or suspended, limiting career prospects even after serving a sentence.

Financial institutions scrutinize felony records when assessing loan applications, making it harder to obtain mortgages, business loans, or lines of credit. Some lenders impose higher interest rates due to perceived risk, while others deny financing altogether. Landlords may also hesitate to rent to individuals with a history of financial crimes.

Expungement or record sealing is rare for tax-related felonies under federal law. The long-term repercussions of a conviction extend beyond the courtroom, affecting nearly every aspect of financial and professional life.