Understanding the Difference Between Tax Fraud and Tax Evasion

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Difference Between Tax Fraud and Tax Evasion

Sometimes, it can feel like the difficulties with filing your taxes are never-ending, especially for small business owners and those with multiple tax documents to sort through. When filing your taxes, it is easy to feel overwhelmed or concerned that something might slip through the cracks. When this happens, you may begin to wonder if you accidentally committed some sort of tax crime by misfiling your taxes. The Fiscal Solutions Group is here to dispel any myths or unnecessary concerns you may have about various tax crimes, including the difference between tax fraud and tax evasion. Read on to learn more about how to avoid committing tax fraud or tax crimes and what to do if you’ve committed a tax crime.

Tax Fraud

Despite what many popular portrayals of tax fraud in the media suggest, tax fraud is not one singular crime but an umbrella term for a number of violations of tax law. The IRS defines tax fraud as “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believed to be owing.” 

Let’s unpack this definition. There are two key components of any form of tax fraud outlined in the above definition: specific purpose and owed tax. This means that you cannot accidentally commit tax fraud. To prove that someone is guilty of tax fraud, the IRS must prove that the individual has committed an affirmative act of fraud. An affirmative act is an action done with the intent to mislead the IRS and government or obscure income to avoid paying taxes owed to the IRS. Affirmative acts include:

  • Placing assets under someone else’s name
  • Completing transactions in cash
  • Paying debts or obtaining receipts in another person’s name

Furthermore, forgetting to report income or file a tax return does not qualify as tax fraud because one is not specifically failing to file or report to avoid paying taxes that they know are owed to the IRS. Even failing to pay taxes that you know you owe cannot necessarily get you convicted of tax fraud unless you also commit an affirmative act in an attempt to avoid paying that tax. 

Civil Tax Fraud vs. Criminal Tax Fraud

Now that we understand a little more about what exactly constitutes tax fraud, it’s important to know the different consequences that you may face if you are convicted of tax fraud. There are two kinds of tax fraud that are tried in court: civil and criminal. The primary differences between these two categories are the level of proof that the court needs to successfully convict and the consequences of a successful conviction. 

Civil Tax Fraud

To successfully convict someone of civil tax fraud, the IRS must prove fraud by “clear and convincing evidence” that the individual both failed to pay part of their taxes and avoided that payment through fraudulent means. Clear and convincing evidence does not necessarily mean that the evidence proves that someone absolutely committed a crime. Rather, this means that the court only needs to prove that it is substantially more likely to be true that someone committed fraud than untrue. Penalties for civil tax fraud are monetary and include either paying a fine or the removal of assets to repay the taxes owed plus an additional penalty, which is a percentage of the taxes owed.

Criminal Tax Fraud

 Criminal tax fraud is far more difficult to prove in a court of law, and because of this, the penalties for criminal tax fraud are more severe. Criminal tax fraud is a felony that requires evidence “beyond a reasonable doubt” to secure a conviction. This means that the IRS must prove to the jury that there is no other reasonable explanation provided by the evidence for the events other than fraud. Unlike civil tax fraud, it is not enough to prove that it is highly likely for the defendant to have committed fraud: there must be no other reasonable explanation. Penalties for criminal tax fraud include, generally, up to five years of jail time, fines up to either $100,000 or $250,000 depending on the crime, and sometimes an additional civil tax fraud conviction. 

Tax Evasion

Tax evasion falls under the umbrella of tax crimes covered by tax fraud. It is the intentional evasion of owed tax, including an affirmative act made to evade taxes or evade the payment of taxes. According to the IRS, there are a few common affirmative acts involved in tax evasion, including the intentional understatement of taxable income, claiming false or misleading tax deductions, making improper credits and exemptions, and more. The same rules apply to tax evasion as to tax fraud. There must be intent and an affirmative act in order for an underpayment to qualify as tax evasion. 

Interestingly, tax evasion is a more serious charge than tax fraud alone because it is a specific crime under the fraudulent umbrella. This means that the penalties for criminal tax evasion tend to be higher than those for tax fraud, and the burden of proof, or the amount of evidence that the IRS is required to bring to the jury, is higher. 

Tax Avoidance

Although the term tax avoidance sounds like a synonym for tax evasion, it is actually a completely legal way to minimize one’s tax liability, also known as the amount of income tax an individual or business owes to the IRS. Generally speaking, tax avoidance involves claiming as many legal and reasonable credits and deductions as is allowed, as well as keeping detailed records and making investments with taxes in mind. Tax avoidance does not mean avoiding owed taxes; it means avoiding owing more taxes in the first place and avoiding the overpayment of taxes. 

Tax Relief With Fiscal Solutions Group 

If you are concerned about whether you have committed a tax crime or want to learn more about tax avoidance, it’s best to speak with experts who can dedicate their time and knowledge to your specific tax needs and questions. At Fiscal Solutions, we specialize in resolving your IRS tax problems through negotiation and fighting against the IRS. At Fiscal Solutions Group, we know how to make tax laws work for you. Contact us today for a free consultation to talk about all of your tax problems and needs. 

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