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What is the Difference Between Tax Fraud and Tax Evasion?

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    You may see the terms “tax fraud” and “tax evasion” thrown around interchangeably on the news when you hear about white collar crime. While both are potentially serious criminal tax charges under the Internal Revenue Code, each contains its own set of criteria and implications. Knowing the difference can be important if you ever face an audit, eggshell audit, reverse egg shell audit, criminal tax investigation, or criminal tax prosecution.

    Tax fraud and tax evasion are both federal crimes, punishable by prison time and severe fines. Both crimes also require a showing of intent. Statutorily, tax fraud and tax evasion are very similar. However, tax evasion is a more serious, specific charge that is under the tax fraud umbrella. In other words, tax evasion is a more serious form of tax fraud. As such, the burden of proof for tax evasion is higher, and so are the penalties.

    Tax fraud and tax evasion charges can be very serious. Ensuring that you are compliant can save you from the issues that may be brought up because of an audit or investigation. The dually licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing show up every day ready to take on the IRS on behalf of clients just like you. To hear from us, call our offices at (800) 681-1295.

    What is Tax Fraud?

    Tax fraud refers to a violation of any of several different statutes within Title 26 of the Internal Revenue Code. The term tax fraud comes with the connotation of fraud because there is a requirement that the government prove that the violation was carried out willfully. “Willfully” is defined for these purposes as the voluntary and intentional avoidance of a legal duty to pay income taxes imposed by law or to avoid proper assessment of tax liability. Where someone intentionally fails to pay their true tax liability, they have defrauded the IRS and the federal government.

    Examples of situations where a court might infer willfulness in a tax fraud case include any of the following:

    • Failing to report substantial amounts of income over multiple/consecutive years
    • Failing to file complete tax returns over multiple/consecutive years
    • Providing tax preparer with incomplete or inaccurate information
    • Making false statements to IRS agents
    • Keeping multiple record logs or books
    • Destroying or hiding record logs or books
    • Destroying invoices and other client information
    • Creating false documents or records
    • Placing property in the name of another person while retaining control
    • Excessive use or spending in cash
    • Bank accounts using fictitious names
    • History of conspicuous tax behavior
    • Inaccurate dating of documents
    • Illegal revenue streams

    As such, tax fraud does not include instances where a taxpayer accidentally failed to pay taxes or mistakenly provided false information which improperly reduced their tax liability. Such situations are deemed to be tax negligence. Tax negligence is not a felony in most instances and is typically punished by the imposition of civil penalties. The penalty will usually amount to some percentage (typically around 20%) of the outstanding obligation that was mistakenly underreported. In contrast, tax fraud is a federal felony and is punishable by prison time and/or the imposition of fines.

    What is Tax Evasion?

    The statute that defines federal tax evasion is 26 U.S.C. § 7201. To establish tax evasion, the government must prove that there was an affirmative, willful act to evade a tax assessment or payment of a tax that was assessed, and that the additional tax is rightfully still owed. If these elements may seem like the general requirements for the various tax fraud statutes, that’s because they are. Tax evasion can be thought of as a smaller facet within the long arm of tax fraud law.

    In addition to the severity of the penalties that may be imposed, there are two key differences that separate tax evasion from the rest of the tax fraud crimes: burden of proof and statute of limitations.

    Burden of Proof for Tax Evasion

    The burden of proof is a legal term for establishing how convincing the prosecution’s argument must be to achieve a conviction. To convict a defendant for tax evasion, the government must prove their case “beyond a reasonable doubt.” This is the highest burden available and is required in many of the most serious first-degree felony charges such as murder. To prove something beyond a reasonable doubt requires that the jury believes that the defendant is guilty without a doubt in their mind.

    In contrast, the burden of proof for most tax fraud charges is “clear and convincing evidence.” While the jury must still believe that it is substantially likely that the defendant is guilty, they are still permitted to reach a guilty verdict while harboring some small level of doubt. The discrepancy in burden of proof is likely due to the increased penalties that come with a tax evasion charge.

    Statute of Limitations for Tax Evasion

    The statute of limitations is the legal way of imposing a time limit on how long the government must bring their case. For tax evasion, the statute of limitations is five or six years depending on what code section is relied upon by the government. While the time that the clock starts to run is still debated in courtrooms, this puts a finite limit on the government’s ability to press charges for this specific tax crime but beware of the concept of the last affirmative act. If the last affirmative act of a tax crime occurs within a time that is not barred by the statute of limitations the crime can still be prosecuted even if the original crime is barred by the statute of limitations. Lying to a federal agent about a crime that occurred 10 years ago can be viewed as the last affirmative act of the 10-year-old crime which can now be currently prosecuted.

    Conversely, the statute of limitations in tax fraud charges depends on the specific crime that is alleged. There is no statute of limitations on civil tax fraud charges (i.e., tax code violations that do not carry a penalty involving prison time). Some tax fraud charges carry three-year time limits, such as Failure to Keep Records and Failure to Supply Information. Others carry six-year time limits and may be charged concomitantly with tax evasion.

    Defend Yourself Against Tax Fraud and Tax Evasion Charges

    If you are afraid, you may have fallen out of compliance and are concerned about what constitutes tax fraud or tax evasion, our tax attorneys and CPAs can provide you with an overview of your case and prepare your defense. Call the Tax Law Offices of David W. Klasing today at (800) 681-1295.

    Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

    It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us.

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