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.
The phrase tax fraud creates the most confusion. In federal practice, it can describe both a civil fraud penalty case and a criminal tax case, but it is not the name of one single all-purpose federal crime. Civil fraud usually refers to the 75 percent penalty imposed under 26 U.S.C. § 6663 on the portion of an underpayment attributable to fraud. Criminal fraud refers to intentional conduct that can be charged under one or more criminal tax statutes, including tax evasion under 26 U.S.C. § 7201, false-return and false-document charges under 26 U.S.C. § 7206, misdemeanor false-document charges under 26 U.S.C. § 7207, payroll tax crimes under 26 U.S.C. § 7202, and, in the right case, false statements under 18 U.S.C. § 1001. Civil and criminal consequences can arise from the same underlying conduct.
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.
Tax Fraud is Often an Umbrella Label, Not a Single Federal Charge
When people say tax fraud, they often mean intentional tax cheating in a general sense. Federal law uses the concept more precisely. In the civil system, fraud means intentional wrongdoing with the specific purpose of evading a tax known or believed to be owing. The government must prove civil fraud by clear and convincing evidence, and the penalty is generally 75 percent of the fraudulent portion of the underpayment. In the criminal tax system, the same conduct can trigger prosecution, in which the government must prove guilt beyond a reasonable doubt.
That is why tax fraud can describe a category of criminal tax exposure without naming the exact statute. In one case, the government may charge tax evasion under Section 7201. In another, it may charge a false return under Section 7206(1), aiding the preparation of a false return under Section 7206(2), misdemeanor false documents under Section 7207, willful failure to collect or pay over employment taxes under Section 7202, or false statements under 18 U.S.C. § 1001. The label sounds broad because it is broad. The actual criminal tax risk depends on which statute fits the taxpayer’s conduct and what the government can prove.
This distinction becomes critical in defense work because the elements are not interchangeable. A civil tax fraud case requires proof of a fraudulent underpayment. A Section 7201 evasion case requires a tax due and owing plus an affirmative attempt to evade. A Section 7206 false-return case focuses on a materially false document signed under penalties of perjury. Section 7207 reaches willful delivery or disclosure to the IRS of a false or fraudulent document, even when it is not signed under penalties of perjury, and it is generally used as a misdemeanor tool in narrower circumstances. A serious defense strategy, therefore, begins by identifying exactly what risk the facts actually create, rather than reacting to the generic term “fraud.”
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.
Tax Evasion Under Section 7201 is the Classic Felony, But it Requires More Than a Bad Return
Tax evasion under 26 U.S.C. § 7201 remains the flagship federal felony tax charge. It applies to anyone who willfully attempts in any manner to evade or defeat any tax or the payment of tax. The government must prove three elements: an additional tax due and owing, an affirmative attempt to evade or defeat the tax or its payment, and willfulness. The statute authorizes up to five years of imprisonment per count, criminal fines, and costs of prosecution.
Those elements are what separate evasion from many other tax crimes. A false return can support an evasion charge, but evasion does not stop at the return itself. The government is looking for affirmative acts. IRS criminal materials list familiar examples: keeping double sets of books, making false entries or invoices, destroying records, concealing assets or income sources, handling affairs to avoid the records normally created in those transactions, and other conduct likely to mislead or conceal. False statements to Treasury agents can also qualify as affirmative acts of evasion. By contrast, a willful failure to file or pay, standing alone, does not automatically become tax evasion unless affirmative acts accompany it.
That difference matters in real cases. A taxpayer can underreport income and face civil adjustments without automatically becoming an evasion defendant. But once the facts include concealment, fabricated documents, nominee structures, false explanations to agents, or deliberate movement of money and records to keep the IRS in the dark, the government has the type of conduct that supports a Section 7201 theory. That is why high-risk audits, payroll cases, and offshore cases often turn not just on the amount at issue, but on what the taxpayer did to hide the truth.
False Statements Can Be a Separate Crime Even When the Government Cannot Prove Full-Blown Evasion
False statements create their own criminal risk in tax cases. Section 7206(1) makes it a felony to willfully make and subscribe a return, statement, or other document under penalties of perjury that the signer does not believe to be true and correct as to every material matter. The IRS identifies four elements: the making and signing of the document under penalties of perjury, falsity as to a material matter, lack of belief that it was true and correct as to every material matter, and willfulness. Section 7206 carries a maximum sentence of up to 3 years of imprisonment, criminal fines, and costs of prosecution.
That offense differs from evasion in an important way. Section 7201 requires an additional tax due and owing, plus an affirmative attempt to evade. Section 7206(1) does not list those as elements. It punishes the willful submission of a materially false tax document signed under penalties of perjury. That is why false-return charges can appear in cases where proving a classic tax deficiency or a full evasion theory would be more difficult. In practical terms, if a taxpayer signs a materially false return, amended return, affidavit, financial disclosure, or other perjury-backed tax document, the government may not need to prove the entire Section 7201 evasion structure to bring serious felony charges.
Section 7206(2) creates another felony risk for return preparers, advisers, corporate personnel, and others who aid or assist the preparation or presentation of a materially false return or tax document. The document does not need to be signed by the defendant, and the defendant need not prepare it. Section 7207 covers willful and knowing delivery or disclosure to the IRS of a false or fraudulent document, whether or not it is signed under penalties of perjury, and it carries misdemeanor exposure of up to one year. IRS criminal materials explain that Section 7207 is generally reserved for narrower false-document cases, often involving altered substantiation in an examination where a misdemeanor charge fits better than a felony.
False statements to IRS personnel can also trigger 18 U.S.C. § 1001. That statute generally covers knowingly and willfully making materially false statements, concealing material facts through a trick, scheme, or device, or using false documents in matters within federal jurisdiction. In tax practice, Section 1001 is generally not the preferred charge for a false statement on a signed tax return because Section 7206(1) is the more natural fit. But Section 1001 commonly appears in criminal tax matters involving false statements or documents submitted to IRS agents during an audit, collection matter, or investigation. A taxpayer who lies in an interview, hands over a doctored document, or conceals a material fact during the exam process can therefore create a separate false-statements problem on top of the underlying tax case.
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.
Contact the Tax Law Offices of David W. Klasing if You Are Concerned About Tax Fraud, Evasion or Giving False Statements
At the Tax Law Offices of David W. Klasing, we handle criminal tax matters with the understanding that the label attached to the case often lags behind the real danger. A taxpayer may think the issue is only an audit adjustment, a payroll tax issue, an amended return, or a records dispute. In reality, the government may already be evaluating concealment, willfulness, false documents, or false statements. That is the stage at which the distinction between tax evasion, tax fraud, and false statements ceases to be academic and begins to shape exposure to felony charges, restitution, civil fraud penalties, and incarceration.
Our dual-licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing can help identify which criminal statute the facts implicate, whether the issue remains civil, whether a false-return or false-statements theory has emerged, and whether voluntary disclosure or another damage-control strategy should be considered before the government hardens its narrative. Where significant risk already exists, our CPAs work under attorney supervision as part of the legal team to support legal advice and help preserve applicable attorney-client privilege and work-product protections as the law allows. That structure can matter enormously when a taxpayer’s prior filings, interviews, and records may themselves become evidence.
If you underreported income, claimed deductions you cannot support, signed returns you now know were materially false, made statements to the IRS that may not hold up, or face a payroll, offshore, or audit matter with badges of fraud, this is the point to act with precision. The right defense begins by identifying exactly what the government could charge, what it still has to prove, and what steps now reduce the risk of turning a civil tax problem into a criminal tax case. Call the Tax Law Offices of David W. Klasing at 800-681-1295 for a confidential, reduced-rate initial consultation HERE.
