Tax Fraud/Evasion vs. Tax Avoidance

What is the difference? Is tax fraud a crime? Can you go to prison?

Fraud is obtaining something of value from another by deception. Tax fraud occurs when a taxpayer commits or avoids certain acts with the intent of evading taxes owed. For tax fraud to occur, both intent and a tax due and owing are required. Deceit, subterfuge, camouflage, concealment or obscuring events to appear as something other than their true nature are key ingredients in tax evasion.

Tax evaders often:

  1. understate or omit income
  2. falsify deductions
  3. misrepresent allocation of income
  4. take improper claims, credits or exemptions
  5. conceal assets

Tax fraud occurs when a taxpayer intentionally fails to:

  1. file or prepares and files a false income tax return
  2. pay taxes owing or intentionally underreports income

For fraud to be established an affirmative act of fraud must occur including:

  1. hiding bank accounts or other assets
  2. covering up sources of income
  3. failure to deposit receipts to business accounts

Fraud cannot be established absent an affirmative act of fraud. A common component of a tax crime includes a willfulness to act or not act including voluntary or intentional violation of a legal obligation.

Tax avoidance is not a crime. Using legitimate means and for a legitimate purpose, taxpayers may minimize their tax burden. It is important to understand taxpayers that do not conceal or misrepresent their actions but instead use tax planning, event timing, and taking advantage of legitimate methods provided for in the Tax Code are within their rights and not subject to the consequences of commission of a tax fraud. A good faith misunderstanding of the law or belief that a law has not been violated negates the willfulness component of tax evasion.

If a taxpayer commits tax fraud, the consequences are severe. The conviction will determine the specific penalty however the following are not uncommon:

  1. Attempt to evade or defeat paying taxes: Upon conviction, the taxpayer is guilty of a felony and is subject to other penalties allowed by law, in addition to (1) imprisonment for no more than 5 years, (2) a fine of not more than $250,000 for individuals or $500,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7201).
  2. Fraud and false statements: Upon conviction, the taxpayer is guilty of a felony and is subject to (1) imprisonment for no more than 3 years, (2) a fine of not more than $250,000 for individuals or $500,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7206(1)).
  3. Willful failure to file a return, supply information, or pay tax at the time or times required by law. This includes the failure to pay estimated tax or a final tax, and the failure to make a return, keep records, or supply information. Upon conviction, the taxpayer is guilty of a misdemeanor and is subject to other penalties allowed by law, in addition to (1) imprisonment for no more than 1 year, (2) a fine of not more than $100,000 for individuals or $200,000 for corporations, or (3) both penalties, plus the cost of prosecution (26 USC 7203).

Committing tax fraud is very different than not paying your taxes. You cannot go to prison for failing to pay your taxes. The IRS has provisions for non-payment of your tax obligation. However, it is imperative that you file an accurate return on time. Payment extensions, installment plans and offers in compromise are options that may be available. Remember, it is not a crime to have money problems; it is a crime to commit tax evasion.

When you find yourself facing tax issues that may be construed as tax fraud, it is imperative that you engage the services of a seasoned tax professional. In less than 4 minutes, TaxHell.com will connect you with a local tax professional to help navigate the challenges of dealing with the IRS or your state taxing authority.

TaxHell.com & TaxHeaven.com connect taxpayers with verified local tax and accounting professionals.  Learn more at www.taxheaven.com or www.taxhell.com.

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