How is Tax Fraud Different From Tax Evasion

How is Tax Fraud Different From Tax Evasion

How Tax Fraud is Different From Tax Evasion

How Tax Fraud is Different from Tax Evasion: Understanding the difference between civil tax fraud violations and tax evasion crimes is very important for US Taxpayers. When it comes to tax violations, domestic or international — two of the most common terms you will find in your research are the terms tax fraud and tax evasion. Typically, tax fraud is more of a general term that refers to the intentional misrepresentation of facts — either intentional omissions or misrepresentations. Meanwhile, tax evasion is a crime — in which the Taxpayer may become subject to both monetary fines and incarceration. In general, most tax violations are civil in nature. But, each year the US government prosecutes various types of criminal tax cases, including criminal tax evasion. Recently, the US government’s emphasis has been on offshore tax and reporting matters, cryptocurrency, and syndicated conservation easements. Let’s explore the difference between tax fraud and tax evasion — and how it impacts US Taxpayers.

Civil Tax Fraud

Unless tax fraud is being pursued as tax evasion, tax fraud is typically civil in nature. That means, that while the penalties for tax fraud violations can be bad — it does not involve any incarceration such as jail or prison. With civil tax fraud, the US government must show by clear and convincing evidence that the Taxpayer committed fraud. On the sliding scale of evidentiary proof, Beyond a Reasonable Doubt is typically the highest — and required in criminal cases. Next, is clear and convincing evidence (civil)– and then finally the preponderance of the evidence (civil).

In terms of quantifying these degrees of proof — clear and convincing evidence is generally thought of as 75% — whereas preponderance of the evidence is the lowest — more than 50%. Since beyond a reasonable doubt refers to criminal and a potential loss of freedom, it is generally quantified at 95% (these percentages are general guidelines not actually quantified.)

26 U.S. Code § 6663 – Imposition of fraud penalty U.S. Code

        • (a) Imposition of penalty If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

        • (b) Determination of portion attributable to fraud If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

        • (c) Special rule for joint returns In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

Tax Fraud & IRM (Internal Revenue Manual)

The Internal Revenue Manual is a usually good source of information (not force of law) on how the IRS operates regarding various tax matters — including civil tax cases.

Let’s take a look at what the internal revenue manual says: Definition of Fraud

      • Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.

      • Tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both: a tax due and owing; and fraudulent intent. Requirements of Proof

      • Understanding the requirements of proof is essential in establishing fraud. In all criminal and civil tax fraud cases, the burden of proof is on the government.

      • The major difference between civil and criminal fraud is the degree of proof required.

        • In criminal cases, the government must present sufficient evidence to prove guilt beyond a reasonable doubt.

        • In civil fraud cases, the government must prove fraud by clear and convincing evidence. Civil vs. Criminal

      • Civil fraud results in a remedial action taken by the government, such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as part of the unpaid balance of assessment.

      • Criminal fraud results in a punitive action with penalties consisting of fines and/or imprisonment. Criminal penalties: Are enforced only by prosecution; Are provided to punish the taxpayer for wrongdoings; and Serve as a deterrent to other taxpayers.

      • A tax fraud offense may result in both civil and criminal penalties. Restitution may be ordered in criminal tax cases pursuant to a plea agreement or a conviction under Title 18 U.S.C. and may be required as a condition of probation. Avoidance vs. Evasion

      • Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability within the parameters of the law.

      • Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.

      • Common evasion schemes include:

        • Intentional understatement or omission of income;

        • Claiming fictitious or improper deductions;

        • False allocation of income;

        • Improper claims, credits, or exemptions; and/or

        • Concealment of assets. Indicators of Fraud vs. Affirmative Acts of Fraud

Indicators of Fraud

      • Taxpayers who knowingly understate their tax liability often leave evidence in the form of identifying earmarks (or indicators).

      • Indicators of fraud serve as a sign or symptom, or signify that actions may have been taken for the purpose of deceit, concealment or to make things seem other than what they are. Indications, in and of themselves, do not establish that a particular action was taken.

      • Examples include substantial unexplained increases in net worth, substantial excess of personal expenditures over available resources, bank deposits from unexplained sources substantially exceeding reported income, and documents that appear to be altered or false.

Affirmative Acts (Firm Indications) of Fraud

      • Affirmative acts of fraud are those actions that establish that a particular action was deliberately done for the purpose of deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are.

      • Fraud cannot be established without affirmative acts of fraud.

      • Examples include deliberate or intentional omission of specific items where similar items are included; concealment of bank accounts or other assets; willful failure to deposit receipts to business accounts; and covering up sources of receipts.

Criminal Tax Evasion

Unlike civil tax fraud, in which penalties are limited primarily to monetary penalties — when a Taxpayer is convicted of tax evasion, they have been convicted of a crime. This means the Defendant may not only be subject to criminal fines, but may also be subject to confinement along with the monetary penalties. Tax evasion comes in all different shapes and sizes. Sometimes, it is relatively straightforward and amounts to little more than a Defendant knowingly falsifying their tax return. Other situations are much more complex and may involve ancillary issues such as money laundering, structuring, smurfing in and other crimes along with it.

26 U.S. Code § 7201- Attempt to evade or defeat tax

      • 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.

US DOJ Criminal Tax Manual

One of the best sources of information regarding criminal tax and how the US government may pursue a criminal tax evasion case is the DOJ Criminal Tax Manual. The manual is a source of guidance published by the Department of Justice and while it cannot be cited as a law — it goes a long way in helping taxpayers understand how the US government pursues a criminal tax evasion.

Here is what that Department of Justice manual provides specifically on the issue of tax evasion (e.g., attempts to evade or defeat tax)


      • “Tax evasion” is a shorthand phrase that many people use for all manner of tax fraud. But the charge of tax evasion, in violation of 26 U.S.C. § 7201, is not necessarily the best one to bring against individuals defrauding the IRS. Defendants frequently seek to exploit the fact that, in order to establish the crime of tax evasion, the government must prove the existence of a tax due and owing and willfulness.

      • Prosecutors therefore should consider other charges, such as conspiring to defraud the United States, 18 U.S.C. § 371; filing false returns, 26 U.S.C. § 7206; or endeavoring to obstruct the IRS, 26 U.S.C. § 7212(a), as alternatives or supplements to the charge of tax evasion.

What does this Mean?

It means that although the term tax evasion is thrown around loosely, the government must be able to prove the existence of a tax due and owing — and willfulness. Therefore, often times defendants will try to find ways to blow up the government’s case from the outset by showing there is no tax due and owing — or that it has been paid.


  • The means by which defendants can attempt to evade are virtually unlimited. As noted above, Section 7201 expressly prohibits attempts to evade tax “in any manner.” In order to violate Section 7201, the taxpayer generally must take some affirmative action with an intent to evade tax.

  • The general rule is that omissions to act will not satisfy the affirmative act requirement. For example, a mere failure to file a return, standing alone, cannot constitute an attempt to evade taxes. See Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Hoskins, 654 F.3d 1086, 1091 (10th Cir. 2011) (“To be liable under § 7201, a defendant must do more than passively fail to file a tax return”); United States v. Nelson, 791 F.2d 336, 338 (5th Cir. 1986). – 6 – Generally, for tax evasion purposes, “any conduct, the likely effect of which would be to mislead or to conceal” constitutes an affirmative attempt to evade tax. Spies, 317 U.S. at 499; see, e.g., United States v. Bishop, 264 F.3d 535, 545 (5th Cir. 2001).

  • Even an activity that would otherwise be legal can constitute an affirmative act supporting a Section 7201 conviction, so long as the defendant commits the act with the intent to evade tax. See United States v. Voigt, 89 F.3d 1050, 1090 (3d Cir. 1996); United States v. Jungles, 903 F.2d 468, 474 (7th Cir. 1990) (taxpayer’s entry into an “independent contractor agreement,” although a legal activity in and of itself, satisfied “affirmative act” element of Section 7201); United States v. Conley, 826 F.2d 551, 556- 57 (7th Cir. 1987) (use of nominees and cash with intent to evade payment of taxes).

What does this Mean?

It means that one crucial element to bringing a tax provision case is that the Taxpayer must have taken an affirmative action in order to evade tax and therefore violate the code section — nearly failing to file a tax return without any other additional violations in and of itself is insufficient to pursue a tax evasion case — although there are other crimes to government can pursue.

Not All Tax Violations are Fraud or Criminal

It is human nature that when a person makes a mistake or does something improper — especially when the Internal Revenue Service and US Government are involved — their brain tends to focus on the most serious tax consequences and outcomes possible. In reality, most tax violations are not going to amount to fraud — and are not sufficient for the government to bring a tax evasion case. If a Taxpayer believes they may have committed a violation, they should reach out to a Board-Certified Tax Attorney Specialist to discuss the facts and circumstances surrounding noncompliance.

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