Tax Evasion vs. Tax Fraud: What’s the Difference?

The Internal Revenue Service (IRS) takes federal tax evasion and fraud very seriously. It imposes stiff fines and even prison sentences on individuals who actively avoid paying their share of income taxes, distinguishing it from legal tax avoidance strategies.

While the terms “tax evasion” and “tax fraud” are often used interchangeably, they have important legal distinctions under U.S. tax law. The key difference is that tax fraud can be either civil or criminal, whereas tax evasion is always a criminal offense. Tax evasion often results in criminal prosecution and carries harsher penalties, including potential criminal charges.

Understanding the difference between criminal tax evasion and criminal tax fraud is crucial if you’re facing IRS scrutiny or want to ensure your tax practices comply with federal law. The following article explains the difference between income tax fraud and tax evasion,​ and the penalties you could face if you’re found to have committed either act.

What Is Tax Fraud?

Tax fraud involves an intentional or willful act to deceive the IRS. This often involves either filing a false tax return or a deliberate misrepresentation that reduces the amount of tax owed. Tax fraud can be prosecuted as a civil matter or a criminal offense, depending on its severity and the circumstances.

Common examples of tax fraud include situations where a taxpayer:

• Underreports income they received
• Claims inflated tax deductions for contributions to tax-exempt organizations​
• Claims deductions for business expenses that were actually personal if they are self-employed or own a small business
• Does not file a required tax return
• Uses a false Social Security number

Tax fraud is often discovered during an IRS audit​ or when someone reports the taxpayer to the IRS. The IRS encourages people to report tax crimes by offering rewards for providing information to the agency.

The IRS does not accept referrals by phone, so those who’d like to report a tax crime must file online or by mail. If the IRS determines that further action is necessary, it refers the issue to the IRS Criminal Investigation Division.

Tax Fraud and Identity Theft

Identity theft scams can result in tax fraud when someone uses stolen personal information to request a large tax refund on behalf of a taxpayer. The refund is then deposited directly into the criminal’s bank account or on prepaid debit cards.

In most cases, the taxpayer whose identity was stolen first learns of the illegal activity when they try to file their income tax returns and the IRS informs them that a return has already been filed. The IRS will also notify taxpayers when it suspects they have received a fraudulent return.

Examples of Tax Fraud

Other examples of taxpayer behavior that the IRS considers intentionally fraudulent or criminal​ include:

• Taking payments in cash and failing to deposit them in order to avoid tax consequences
• Inflating the value of business expenses​
• Creating false business expenses for tax purposes
• Keeping two sets of financial records for your business
• Claiming an exemption​ for a spouse when you are single
• Claiming an exemption for a dependent whom you never supported
• Destroying your books to conceal tax evasion
• Creating false checks or receipts to support deductions that don’t exist
• Denying that deposits in your accounts are income when they are
• Concealing financial accounts from the IRS
• Transferring assets to conceal them from the IRS
• Making false statements​ to the IRS under oath
• Failing to file returns despite having been contacted in prior years by the IRS for failing to file

This is not a comprehensive list.

What Is Tax Evasion?

Tax evasion occurs when a taxpayer intentionally fails to pay their full tax liability. Unlike tax fraud, tax evasion is always treated as a criminal offense and applies to both the nonpayment and underpayment of taxes. The tax code​ breaks down evasion into two categories: willful attempts to avoid assessment and willful intent to evade payment of tax. Let’s take a look at each of them.

Evasion of Assessment

In this case, the taxpayer takes an action to prevent the IRS from properly assessing their tax liability. This requires the IRS to prove more than negligence. The taxpayer must have acted intentionally. An intentional underreporting of income qualifies as an attempt to evade assessment.

Evasion of Payment

Affirmative acts to evade payment often involve concealing money or assets from tax authorities. For example, moving reported income into offshore accounts in a country recognized as a tax haven would be considered evasion of payment. Simple non-payment of taxes owed is not evasion of payment, as there must be an affirmative act to conceal.

How the IRS Determines Evasive Actions

For someone to be found guilty of tax evasion, the IRS must prove that they acted with intent. There are no hard-and-fast rules regarding when a taxpayer‘s actions will be found to be intentional. The IRS considers several factors when making that determination. However, the IRS will usually find that you have committed tax evasion if it is clear that your lifestyle and spending could not be supported by the income that you reported on your return.

Situations where a taxpayer may be found to have acted intentionally to avoid paying taxes include:

• Reporting that their assets were owned by someone else
• Accepting payment for goods or services that were not reported to the IRS

Other actions may also be construed as evasive. Here are some that federal courts have found to be tax evasion:

• Filing a false return
• Keeping a double set of books
• Making false invoices
• Concealing sources of income
• Destruction of records
• Holding real estate or property in another person’s name
• Overstating deductions
• Using credit cards to access accounts held in other people’s names

The IRS will act on any suspected case of tax evasion.

Key Differences: Tax Evasion vs. Tax Fraud

While tax evasion and tax fraud share similarities, understanding their differences is important. We’ve gathered the important distinctions in the chart below:

Penalties for Tax Fraud and Tax Evasion

Tax evasion is always considered a criminal act, subject to penalties that may include jail time. Tax fraud can be either civil or criminal.

Civil Penalties for Tax Fraud

The tax code provides for civil penalties that can be as high as 75% of your unpaid tax liability, but you will not face jail time. In addition, the IRS can’t impose an accuracy-related penalty on a taxpayer found guilty of civil tax fraud.

While you won’t face jail time if you have been charged with civil tax fraud, the IRS has a lower evidentiary standard when it comes to civil fraud. It only needs to prove that it was more likely than not that civil tax fraud occurred. In criminal cases, the IRS must prove guilt beyond a reasonable doubt.

Criminal Penalties for Tax Fraud

The criminal fraud penalties depend on the type of tax fraud committed by the taxpayer.

Willfully failing to file a tax return:

• Up to one year in prison
• A fine of up to $100,000 for individuals ($200,000 for corporations)

Making false or fraudulent statements:

• Up to three years in prison
• A fine of up to $250,000 for individuals ($500,000 for corporations)

Dodging tax obligations with intent can lead to tax fraud penalties that include jail time.

Tax Evasion Penalties

Tax evasion is a felony​ punishable by up to five years in prison and a fine of up to $250,000 ($500,000 for corporations). Misdemeanor tax evasion is a tax code provision applied when a taxpayer fails to file a return or supply information. The misdemeanor designation applies only when the taxpayer did not commit an act that was an attempt to evade tax.

State Tax Evasion and Tax Fraud

The IRS isn’t the only tax agency fighting tax evasion and tax fraud. Many states have a Department of Revenue with resources dedicated to ensuring that taxpayers pay their fair share of income, property, and sales taxes. For example, New York State has a criminal investigation division with 170 full-time employees dedicated to conducting criminal investigations.

Additional Questions? Talk to a Tax Lawyer

If you have questions about whether a tax return you plan to file will create tax problems with the IRS, or if you’re already facing allegations of tax fraud or tax evasion, consulting with a local tax attorney​ is usually a good idea. A tax attorney understands the tax system and can help you address potential problems with your tax filings before the IRS discovers them. They can also defend you if you’re under investigation.