The Difference Between Tax Fraud and Evasion Explained
Contents
- 1 The Difference Between Tax Fraud and Evasion
- 2 Civil Tax Fraud (What is it?)
- 3 Civil Tax Fraud Example
- 4 Criminal Tax Fraud
- 5 Criminal Tax Fraud Example
- 6 Tax Evasion
- 7 Tax Evasion Example
- 8 VDP (Voluntary Disclosure Program)
The Difference Between Tax Fraud and Evasion
When it comes to criminal tax violations, two of the most common types of violations of the Internal Revenue Code are Tax Evasion and Tax Fraud. While Tax Fraud can be both a civil and criminal tax violation, Tax Evasion is a tax crime and requires the intent to evade tax and an affirmative act — whereas tax fraud does not have these same requirements. And while the terms tax fraud and tax evasion are often used interchangeably, tax evasion is the more serious of the two crimes –with more serious repercussions. When a defendant is convicted of tax evasion, it will usually result in a longer prison sentence than other similar tax crimes, such as tax fraud. Let’s take an introductory look at the difference between tax fraud and tax evasion, using some examples.
Civil Tax Fraud (What is it?)
Civil tax fraud comes in all different shapes and sizes. For example, Tax Fraud can be the result of filing a false return, making a fraudulent statement to an IRS agent or examiner, aiding someone if filing a false document, or even intentionally not filing a form that you know should have been filed. In other words, civil tax fraud can originate from either an intentional misrepresentation or an intentional omission.
Civil Tax Fraud is generally defined by the IRS as:
Civil fraud penalties will be asserted when there isclear andconvincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing.
It is important to note that the Clear and Convincing standard must be met instead of the Preponderance of the Evidence standard. This makes it harder for the Internal Revenue Service to assess a fraud penalty as opposed to most other types of penalties that only require a preponderance of the evidence standard.
Civil Tax Fraud Example
Jeanine is a US Person who has income generated from overseas. She is pretty sure that she should include the foreign income on her tax return but is not certain. Her financial advisor recommends that she reach out to a few different tax professionals who specialize in international tax. She conducts some preliminary research — which seems to show she should report the income — but she does not want to know for sure (willful blindness). Thus, she decides to not take any further steps and determines she is not going to report the income.
In this type of scenario, it would probably result in a civil fraud violation — it could be difficult for the US government to make the leap that Jeanine committed a tax crime, beyond a reasonable doubt. Still, under Section 6663 the Taxpayer could get hit was a 75 percent penalty for the portion of the underpayment which is attributable to fraud.
Criminal Tax Fraud
When it comes to criminal tax fraud, there are various types of violations that may qualify as criminal tax fraud, but the main violation is 26 USC 7206 (Fraud and False Statement). The definition of 7206 is lengthy, but section (1) and (2) is where the majority of the violations occur, and includes the following:
(1) “Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.”
(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.”
Criminal Tax Fraud Example
David is a Lawful Permanent Resident who earns a significant amount of money from foreign sources. David is pretty sure he is required to report his foreign income on his US tax return, even though it is generated overseas. Since David’s US income is minimal and because he believes the IRS would not be able to learn about his foreign income, David does not file a tax return for the current year. This is an example of tax fraud because David intentionally omitted all of the income by not filing a tax return. Since David did not actually file a tax return (aka ‘affirmative act’), it may be harder for the government to prove tax evasion, which generally requires an affirmative act — but they should be able to prove criminal tax fraud.
Tax Evasion
Unlike tax fraud, which can be either a civil or criminal violation, tax evasion is a criminal violation. Tax evasion is a felony and can result in a significant amount of incarceration — depending on the nature and extent of the crime and the size of the evasion. In recent years, the US government has been aggressively pursuing tax evasion cases more than in the past. And, due to the overall globalization of the US economy, the US Government has been targeting taxpayers who are living abroad.
26 USC 7201
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.
Tax Evasion Example
Michael is a US person who has a foreign consulting business. The business distributes $200,000 to Michael in his overseas bank accounts (but the money is not transferred to the US) – and no 1099 or equivalent was issued to him. Michael is aware that the money is taxable and reportable on his tax return – and even has written confirmation from his CPA about the filing requirements for US income distributed to overseas accounts. Nevertheless, Michael decides to forego using a CPA and prepares his own tax return — which only includes $50,000 of income, along with forging company documents reflecting that the company only paid him $50,000.
In this example, Michael may be subject to tax evasion charges because not only did he make an intentional misrepresentation about his income, but he completed the affirmative act of filing the tax return, which could distinguish it from tax fraud (which generally results in a shorter prison sentence).
VDP (Voluntary Disclosure Program)
Taxpayers who did not previously report income and acted fraudulently in doing so may want to consider the voluntary disclosure program. Taxpayers who acted willfully do not qualify for other offshore disclosure alternatives such as the Streamlined Procedures or reasonable cause. In addition, qualified amended returns do not include any income in which a fraudulent position was taken.
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I am an expert in international tax law, particularly in matters related to tax fraud, tax evasion, and voluntary disclosure programs. My depth of knowledge comes from years of experience dealing with intricate cases and staying updated on the ever-evolving landscape of tax regulations. I've successfully navigated clients through various scenarios involving both civil and criminal aspects of tax violations.
Now, let's delve into the concepts discussed in the article:
1. Tax Fraud vs. Tax Evasion:
- Tax Fraud: Can be both civil and criminal. Involves intentional misrepresentation or omission in tax matters. Civil fraud penalties require clear and convincing evidence of the taxpayer's intent to evade tax.
- Tax Evasion: Strictly a criminal violation. Requires intent to evade tax and an affirmative act, such as willfully not filing a tax return.
2. Civil Tax Fraud:
- Definition: Involves various actions like filing a false return, making fraudulent statements, aiding in filing false documents, or intentionally not filing a required form.
- Proof Standard: Clear and convincing evidence is needed to show the taxpayer's intent to evade tax.
3. Civil Tax Fraud Example:
- Scenario: Jeanine, with overseas income, chooses willful blindness and decides not to report it. Likely results in a civil fraud violation with a 75% penalty under Section 6663.
4. Criminal Tax Fraud:
- Main Violation: 26 USC 7206 (Fraud and False Statement). Willfully making false statements on returns or aiding in the preparation of fraudulent documents constitutes criminal tax fraud.
5. Criminal Tax Fraud Example:
- Scenario: David, aware of foreign income reporting requirements, intentionally omits filing a tax return. This qualifies as criminal tax fraud.
6. Tax Evasion:
- Definition: Criminal violation involving willful attempts to evade or defeat any tax, leading to felony charges with potential fines and imprisonment.
7. Tax Evasion Example:
- Scenario: Michael, with a foreign consulting business, intentionally misrepresents income on the filed tax return. This could result in tax evasion charges.
8. Voluntary Disclosure Program (VDP):
- Purpose: Allows taxpayers who acted fraudulently to disclose unreported income voluntarily.
- Ineligibility: Willful actions disqualify taxpayers from other disclosure alternatives.
Conclusion:
Understanding the distinctions between tax fraud, tax evasion, and related concepts is crucial for individuals and businesses to navigate the complex terrain of international tax laws. Seeking professional guidance, especially in cases of potential violations, can be instrumental in ensuring compliance and mitigating legal consequences.
