A stockbroker once explained to a group that the difference between tax avoidance and tax evasion is five years in jail. 

A more precise description is provided in U.S. tax code section 7201, which states,

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 5 years, or both, together with the costs of prosecution.

The key word in this definition is "willfully". The courts have generally found that if the taxpayer is aware of the requirements of the law -- or if the taxpayer reasonably should have been aware of the requirements -- and then fails to comply, the evasion is willful.

Foreign persons often find it difficult to understand the concern of U.S. taxpayers and tax professionals regarding tax evasion because the U.S. is reputed to be one of the few major countries in the world where tax evasion is a criminal felony. In many or most other countries it is a misdemeanor and tax evasion is commonplace.  However, many countries have a value added tax in addition to their sales tax and the VAT is harder to avoid than the income tax.

One of the ways affluent taxpayers protect themselves from charges of tax evasion is by securing written opinions from qualified tax professionals before embarking on a transaction that may be unclear or borderline. If they actually do rely on the advice of the tax professional, they can almost always avoid felony charges of criminal tax evasion. However, they are still subject to an assortment of fines, interest and the tax that is claimed to be due unless they are willing to dispute the IRS claims in a court of law.

The IRS claims that there is widespread tax evasion by U.S. persons with offshore financial accounts, foreign corporations, offshore trusts and offshore credit cards. Early in 2003, they embarked on a major project to track down and audit those taxpayers. They offered taxpayers a limited amnesty from prosecution if they would come forward voluntarily by April 15, 2003 and would disclose the identity of any promoters who sold them some kind of offshore financial arrangement.  They also subpoenaed the records of major credit card companies that issued credit cards drawn on foreign banks. As of early March, 2004 they claim the program has generated $170 million in taxes, interest and penalties from about 250 taxpayers but they claim that there are over 750 additional cases that have not yet been settled.

Source:  By Vernon K. Jacobs, 2008 - The Offshore Press, www.offshorepress.com

Vernon K. Jacobs is a CPA, a Chartered Life Underwriter and a Fellow of the Life Management Institute. He is an international tax practitioner and tax author with a focus on international investing and insurance. He has been a college instructor in accounting, personal finance and corporate taxation, and has been a speaker at dozens of professional conferences and seminars. www.vernonjacobs.com

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