When it comes to taxes, mistakes can happen. However, not all mistakes are made equal, and it’s important to know when those errors cross the legal line. You may have heard these terms used interchangeably, but they represent different types of offenses with varying degrees of severity. Below, we explain the difference between tax fraud and tax evasion and clarify some confusion surrounding these terms.
What Is Tax Fraud?
Tax fraud involves intentionally providing false information on tax returns to reduce tax payments. It’s an intentional act of deception aimed at avoiding paying the full amount of taxes you owe to the government. Some common examples of tax fraud include:
- Identity theft—stealing someone else’s identity to file fraudulent tax returns and claim refunds;
- False deductions and credits—claiming deductions or credits not supported by legitimate expenses or income;
- Perjury—lying under oath during a tax audit or investigation; or
- Bribery—offering bribes to tax officials to influence audits or investigations.
The IRS defines tax fraud as any willful attempt to evade tax obligations, which can lead to severe penalties, including fines, interest, and even imprisonment. Tax fraud often involves deliberately deceiving tax authorities, and proving intent is key to building a case. Making a mistake on your tax return can lead to penalties, but it’s not considered fraud unless you intentionally misled the IRS.
What’s the Difference Between Tax Fraud and Negligence?
Negligence involves failing to take reasonable care in preparing your tax return, while tax fraud is an intentional act of deception. While both lead to penalties, typically, negligence charges are less severe than fraud.
What Is the Difference Between Tax Evasion and Tax Fraud?
Tax evasion is a broader term for illegal actions to avoid paying taxes. While tax fraud is a form of tax evasion, not all tax evasion constitutes fraud. Evasion can include more subtle acts like:
- Hiding income—failing to report all income sources, including wages, investment gains, and self-employment earnings;
- Falsifying records—creating or altering documents to support false deductions or expenses;
- Offshore accounts—using foreign bank accounts to hide income and assets from tax authorities; or
- Cash transactions—conducting business transactions in cash to avoid leaving a paper trail.
Distinguishing tax evasion from tax fraud depends on the extent of the intentional deception involved. Although both are unlawful, evasion may not be as openly deceitful as fraud.
Is Tax Evasion a Criminal Offense?
Yes, tax evasion is a criminal offense that can result in both civil and criminal penalties. These penalties can include fines and imprisonment, depending on the extent of the evasion.
Tax Evasion vs Tax Fraud: Why Does Intent Matter?
Intent plays a crucial role in distinguishing between tax evasion and tax fraud. Tax fraud requires intent to deceive, while tax evasion can sometimes occur without overtly fraudulent behavior. For example, suppose someone unintentionally underreports their income due to an accounting error. In that case, they may face penalties for tax evasion but not fraud if there’s no intent to deceive the IRS.
However, if someone knowingly hides income or falsifies records, they’re likely committing tax fraud. The IRS diligently investigates discrepancies in tax returns, but it will look for evidence of willful wrongdoing before pursuing fraud charges.
What Are the Penalties for Tax Fraud vs. Tax Evasion?
While both tax fraud and tax evasion lead to severe consequences, the penalties vary based on the nature of the offense.
Tax Fraud Penalties
In tax fraud cases, the IRS can levy fines up to 75% of the unpaid taxes, in addition to interest and the potential for criminal prosecution. In extreme cases, individuals convicted of tax fraud can face prison sentences of up to five years. Civil penalties may also apply, making the offender’s overall cost of tax fraud astronomical.
Tax Evasion Penalties
While tax evasion also carries serious consequences, the penalties can vary based on the severity of the infraction. For individuals, fines for tax evasion usually range up to $100,000, and severe cases may result in imprisonment for up to five years. Even if evasion doesn’t rise to the level of fraud, the financial repercussions can still be crippling.
What Is the Statute of Limitations for Tax Fraud and Tax Evasion?
Tax fraud and tax evasion have a statute of limitations of six years from the return’s filing date.
About Smith & Holder, PLLC
Smith & Holder, PLLC is a recognized trial and appellate law firm. Our attorneys have extensive experience in various criminal cases, including white-collar crimes like tax evasion and fraud. We are dedicated to delivering top-tier legal guidance representation to our clients.
Resources:
- The Difference between Tax Avoidance and Tax Evasion. Internal Revenue Service (IRS) website, link
- Criminal Tax Manual. US Justice Department (2024), link
- Tax Evasion. Cornell Law School – Legal Information Institute (2024), link
- Tax avoidance is legal; tax evasion is criminal. Wolters Kluwer (2024), link
- What Is Tax Fraud? Definition, Criteria, vs. Tax Avoidance. Investopedia (2024), link
