We get questions all the time about situations that appear to involve tax fraud, but often it is unclear to the person asking the question exactly what activities rise to the level of tax fraud or tax evasion. So here’s a short primer on what tax fraud and tax evasion really mean.
What is Tax Fraud?
Tax fraud is a general term which can trigger many different laws found in Title 26 (the Internal Revenue Code) and Title 18 of the United States Code (or “USC”). The core distinguishing feature of tax fraud is a taxpayer’s intent to defraud the government by not paying taxes that he knows are lawfully due. Tax fraud can be punishable by both civil (i.e. money) and criminal (i.e. jail time and money) penalties, with the civil violations primarily in Title 26 and the criminal violations principally in Title 18, respectively, of the USC. For example, a taxpayer can commit tax fraud and be punished with civil penalties under 26 USC § 6663, without being charged with criminal tax evasion.
Tax fraud as a general matter is very difficult for the government to prove because they have the burden to show the court that the taxpayer has intentionally defrauded the government out of tax revenue. Proving that a taxpayer knowingly violated the highly complicated Internal Revenue Code is a very difficult task, so the government often chooses to pursue the taxpayer civilly for simply underpaying tax, which does not require proving that the taxpayer intentionally underpaid their taxes. As a practical matter, if the taxpayer has any reasonable legal argument for why they did not pay the tax due they will usually beat an allegation of fraud.
What is the difference between Tax Fraud and Tax Evasion?
Tax evasion is a subset of tax fraud. “Tax evasion” is typically used in the criminal context, as in someone who is charged with the crime of tax evasion in violation of 26 USC § 7201. Tax evasion usually entails a deliberate act of misrepresentation of taxable income to the IRS. Common examples of acts which could result in a charge of tax evasion are: not declaring all your income, deliberately overstating expenses or deductions, or failing to file tax returns when you have taxable income in an attempt to avoid detection.
In order for the government to prove that a taxpayer committed the crime of tax evasion, they must prove each of the following three elements of the law beyond a reasonable doubt:
1) the tax deficiency (i.e. that there is an unpaid tax liability);
2) the affirmative act constituting evasion or an attempt to evade either: the assessment of a tax, or the payment of a tax (and not merely an omission or failure to act); and
3) the mental element of willfulness (i.e. that the taxpayer had the specific intent to violate a known legal duty to pay tax).
What are some of the penalties for Tax Fraud and Tax Evasion?
Title and Section |
Definition |
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Title 26 USC § 7201 Attempt to evade or defeat tax |
Any person who willfully attempts 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:
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Title 26 USC § 7202 Willful failure to collect or pay over tax |
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to penalties provide by the law, be guilty of a felony
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Title 26 USC § 7203 Willful failure to file return, supply information, or pay tax |
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof:
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Title 26 USC § 7206(1) Fraud and false statements |
Any Person who… (1) Declaration under penalties of perjury – Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; shall be guilty of a felony and, upon conviction thereof;
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Title 26 USC § 7206(2) Fraud and false statements |
Any person who…(2) Aid or assistance – Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the Internal Revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; shall be guilty of a felony and, upon conviction thereof:
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Title 26 USC § 7212(A) Attempts to interfere with administration of Internal Revenue laws |
Whoever corruptly or by force endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, upon conviction:
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Title 18 USC § 371 Conspiracy to commit offense or to defraud the United States |
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This is not an all inclusive list of the tax fraud and tax evasion sections of the USC, and often the government will go after a taxpayer for multiple violations at the same time.
You don’t need to have evidence of Tax Fraud
The IRS Whistleblower Program applies to more than just cases involving tax evasion and tax fraud. Pursuant to 18 USC § 7623, the IRS can pay an award for information about ANY underpayment of tax. It does not matter if the underpayment is due to evasion, fraud, an aggressive or negligent application of the law, or even an innocent mathematical error or mistake. Your tax lawyer can maximize your award determination by helping the IRS determine the where/when/why of a tax underpayment and how they can prove it. Do not limit yourself to thinking that you can claim a reward only if it relates to “Tax Evasion and Tax Fraud.” Consult with an IRS Whistleblower Attorney to help determine specifically what violations of law your information relates to.
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