What is the Difference Between Tax Fraud and Tax Evasion?

Differences Between Tax Fraud and Tax Evasion

When it comes to US tax violations in general, two of the most common types of tax offenses are tax fraud and tax evasion. While these two types of tax violations can be similar, they are not identical. Tax fraud may include both civil and criminal tax violations — and it does not always require the intent to evade or defeat tax. The offense of tax evasion is different in that it is a criminal violation and specifically requires the attempt to evade or defeat tax. To convict a person of tax evasion, the government must prove that beyond a reasonable doubt, the person willfully attempted to evade or defeat tax. While there are many overlaps between tax fraud and tax evasion, let’s take a look at five key facts differentiating these two tax violations.

Civil Tax Fraud Has No Statute of Limitations

One of the most important aspects of civil tax fraud is that there is no statute of limitations limiting when the IRS can pursue an action. In other words, unlike other statutes which limit the commencement of an action (usually within 3 to 6 years depending on the statute), there is generally no limitation involving civil tax fraud. Thus, the US government could go back one, five, or 10+ years on matters involving civil tax fraud.

Civil Tax Fraud Is Harder to Prove Than Other Civil Tax Violations

There are three main types of standards of proof in the justice system. Most civil violations only require the lowest standard, the preponderance of the evidence, because the fines are limited to monetary penalties. With civil tax fraud, the government must meet the clear and convincing evidence standard instead of just the preponderance of the evidence standard. That is because of the nature of a ‘fraud’ violation and the impact it can have on a person’s reputation. While technically there is no numerical standard to represent each evidentiary standard, the preponderance of the evidence standard is typically thought of as more than 50%, while clear and convincing evidence is typically thought of as more than 75%.

Criminal Tax Fraud Code Sections

One of the key distinctions between criminal tax fraud and tax evasion is that with tax evasion, the person seeks to avoid or evade tax. With criminal tax fraud, there does not have to be an intent to avoid the tax, but rather it could be the willful filing of fraudulent documents – such as for example, submitting fraudulent documentation to the IRS. Some of the more common code sections involved in criminal tax fraud are:

• • • 26 U.S. Code § 7203 – Willful failure to file return, supply information, or pay tax

    • 26 U.S. Code § 7206 – Fraud and false statements

    • 26 U.S. Code § 7207 – Fraudulent returns, statements, or other documents

Criminal Tax Evasion Requires Evasion and Affirmative Act

One of the hardest aspects of proving tax evasion for the US government is that in order to prove tax evasion, the government usually must show that the defendant acted willfully and committed an ‘affirmative act’ with the goal of evading or avoiding tax. That is of course a much-simplified version of what is required, but the idea is that there has to be an affirmative act associated with the evasion. For example, if a person does not file a tax return, then while they have potentially avoided certain tax liabilities, this alone is usually insufficient to prove tax evasion. While it may amount to tax fraud, tax fraud is generally a lesser crime compared to tax evasion.

As provided in the DOJ’s Criminal Tax Manual:

• • • “In order to establish the offense of tax evasion, whether of assessment or of payment, the government must prove, inter alia, that the defendant engaged in some affirmative conduct for the purpose of misleading the IRS or concealing tax liability or assets.”

Criminal Tax Evasion Is a Felony

Unlike criminal tax fraud, tax evasion is always a crime — and always a felony. As a result of a felony conviction, there can be a significant amount of incarceration for Defendants who are found guilty, along with impacting the person’s ‘permanent record.’ This may make it harder for a person who was convicted of tax evasion to conduct business, obtain loans, find employment, etc. 

Current Year vs. Prior Year Non-Compliance

Once a taxpayer misses various tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a Quiet Disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.