The Difference Between Tax Fraud and Tax Evasion

Typically, taxpayers prefer to work with a tax services firm to handle their tax filing and other requirements. This is for a variety of reasons, most of which is to stay compliant with regulations. Though filing taxes is required, it’s no secret there are many ins and outs to consider. 

Some of these ins and outs can lead to unintentional errors. However, there are also times when people attempt to take advantage of these scenarios, or loopholes. They look for ways to evade taxes, or simply file false documents. And yes, these are tax crimes, but it is important to understand that not all tax crimes are the same.

You have likely heard of tax fraud and tax evasion. And while pop culture or Hollywood blockbusters might use the terms interchangeably, they are not the same. But what is the difference between tax evasion and tax fraud? Let’s dive in and see.

Tax Fraud Vs Tax Evasion

Tax fraud, by definition, is when an individual or business willfully falsifies information on a tax return. While it might be obvious, the reason for such an act is to limit the amount of taxes due. Essentially, committing tax fraud is an attempt to cheat and avoid paying what you owe.

Some examples of tax fraud are more common than others. For example, making false deductions throughout the year is one of the most common forms. This happens in a variety of ways. Writing off meals or travel expenses as “business,” when they are in fact personal, is one such way.

The same can be applied to products or services you purchase for your home, especially if you work from home. Claiming items are business expenses when they are in fact personal is an attempt to limit your tax liability. 

Another example of tax fraud is using a false social security number. This is typically done in an attempt to “hide” or “misdirect” your tax liability away from you. As you know, your social security number is how the Internal Revenue Service keeps track of your income and tax filings. Therefore, using a fake number is a deliberate attempt to conceal your finances from the IRS.

But there are other forms of tax fraud which aren’t as “creative” as using false social security numbers. One example is simply failing to report income. Whether or not this failure is intentional or not is what would dictate the severity of the crime. 

Not reporting income is more common in private businesses, or professions that deal in cash. It is no secret that cash is more difficult to track, and therefore easier to leave out of reporting. The same can be said for services which accept payments in the form of Venmo, for instance. 

If an individual works for a large company and receives a salaried paycheck, this is much more difficult. 

One more example of tax fraud includes intentionally failing to pay your tax liability. If you file a tax return and are given a liability liability by the IRS, you are required to pay it. By choosing not to pay, you are committing tax fraud. 

This example is a bit different from the others, in that it is simply avoiding your obligation. In the other examples provided, a taxpayer is seeking to misrepresent themselves or conceal their income. Simply avoiding your tax obligation, however, is also tax fraud.

So, since tax fraud seems to encompass quite a bit, what is tax evasion? When it comes to tax evasion vs tax fraud, tax evasion is a more serious crime. That being said, tax evasion is also a form of tax fraud. Specifically, it comes down to the means through which you are committing a tax avoidance scheme.

Tax evasion crimes must involve the use of illegal methods to conceal income or information from the IRS. An example would be hiding income from an illegal enterprise. Concealing cryptocurrency profits is another example of income tax evasion. 

This can be done from the business side of things as well, such as paying employees under the table. In this instance, there is nothing illegal from an enterprise point of view. Rather, a business owner is structuring payment with an effort to avoid taxes.

Are Punishments Severe?

Both tax fraud and tax evasion are serious in the eyes of the IRS. However, this doesn’t mean you will go to jail for committing one or the other. For most individuals and businesses, the tax liability will be settled between the IRS and tax attorneys. 

However, being found guilty of committing tax evasion, for example, will be a felony on your record. For serious cases, jail time can be considered, while fines are the most common. Additionally, you will have court costs to consider if your situation calls for it.

But the most important thing to remember when it comes to tax evasion vs tax fraud is intention. Intentionally committing one or other is much more serious than making a mistake on your tax return. Mistakes are common, which is why taking tax preparation seriously is so important.

Schedule a Free Consultation

There are many taxpayers who feel they are out of options when it comes to tax fraud cases. The reality is that you have all sorts of options pertaining to your tax situation. And those options all start with a free consultation from our tax professionals. 

By getting a consultation with the tax professionals at Innovative Tax Relief, you will know where you stand. This means knowing what options you have available to you, and how to better navigate your situation. We can help you with your tax liability, and put you back in control of your finances. 

Schedule a free consultation today and find out where you stand with your financial situation.