Tag Archive for: Tax Fraud

What's the Difference Between Tax Fraud, Tax Evasion, and Negligence

Paying taxes is required for the workforce and for businesses. No one wants to pay more taxes than required, but purposefully avoiding these payments can open your business up to criminal tax liability. While there are legal loopholes to pay fewer taxes, often framed as tax avoidance, there are also serious offenses when you choose to evade paying your taxes. 

There are different forms of tax manipulation, some of which are federal offenses and can land you in a criminal audit by IRS. IRS criminal audits can lead to hefty fines or worse–– prison time. With a 90% conviction rate, undergoing prosecution by IRS criminal is, indeed, a big deal. So what is the difference between legal avoidance or paying less, illegal tax evasion or paying nothing, and criminal tax evasion (fraud)? The intent is the biggest deciding factor when it comes to determining between fraud, evasion, and negligence. 

What is Tax Fraud?

Tax fraud is, “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believed to be owing.” 

A person or a business purposefully or intentionally manipulates information on a tax return to reduce or avoid the amount of taxes owed. Forms of tax fraud include: 

  • Claiming false deductions 
  • Claiming personal expenses as business expenses 
  • Using false Social Security numbers 
  • Underreporting income
  • Failure to report income 
  • Neglecting reporting payroll taxes 

Every year the government loses millions of dollars from tax fraud. The Internal Revenue Service (IRS) investigates these tax fraud cases to determine if the person or company under question intentionally avoided their taxes owed. Parties who are found guilty are required to pay fines, penalties or, in the case of criminal prosecution, serve prison time. 

What is Tax Evasion?

Tax evasion is a branch of tax fraud. Committing tax evasion is, “using illegal means to avoid paying taxes.” There is still intentional concealment to avert paying taxes. Different forms of tax evasion include: 

  • False or improper claims
  • Omitting or concealing revenue 
  • Purposely underpaying taxes 
  • Hiding interest 

The above list is very similar to the list of fraud criteria, the difference can often be subtle and lie in the harm caused or other criminal elements such as workers compensation fraud resulting in insurance fraud charges. When examining tax evasion cases, IRS views financial circumstances and financial history for suspicious activity or a history of attempts to evade taxes.

If the tax evasion activity is found to be deliberate, it is considered a criminal offense and punishable under federal law. The guilty party can be fined up to a quarter of a million dollars. An individual can be fined up to half of a million dollars for a business. They can also face up to five years of imprisonment.


Negligence is a third form of underpaying taxes. The key difference between tax evasion and negligence charges lies in intent. In the case of negligence, elements can include insufficient payment in taxes due to miscalculations or unintentional errors when submitting tax forms. In order to receive this result, you must prove that omissions were done purely out of error.

Although negligence determination is better than one of fraud or evasion, there is still the possibility of being fined up to 20% of the underpayment. 

Again, the biggest factor between tax fraud, tax evasion, and negligence is intent. Purposeful manipulation and concealing of income to avoid taxes is a punishable offense by the IRS. 

If you find yourself under audit by IRS, consult with our team of experts at Milikowsky Tax Law. Our team of attorneys are equipped to review your specific case and formulate a defense strategy specific to you.

Tax fraud
In the eyes of the federal government, there is a vast difference between a criminal tax fraud offense and a civil fraud offense. These differences focus primarily on the different burdens of proofs, penalties, statues of limitations, and defenses available to the taxpayer. 

For several reasons, often the IRS will first pursue a criminal tax fraud suit before pursuing a civil tax fraud suit. According to the IRS’s own Tax Crimes Handbook, a criminal tax fraud conviction “carries the most severe penalty of the criminal tax offenses.”

Civil tax fraud and criminal tax fraud have different burdens of proof. The IRS carries a “clear and convincing” evidentiary standard for civil tax fraud. (This is otherwise known as a “preponderance of the evidence” standard). By contrast, criminal tax evasion requires proof “beyond a reasonable doubt”—which is a higher evidentiary standard. In other words, the government must prove “more” to show criminal tax fraud than civil fraud.

Civil tax fraud and criminal tax fraud also have different associated penalties. There are several categories of civil tax fraud—for example, there is the fraudulent failure to file a return, accuracy-related penalties under IRC, spousal liability under IRC, and the fraudulent tax return for, e.g., failing to report income on your return and failing to pay tax. Each of these has different associated penalties. For instance, the penalty for fraudulently failing to file a tax return is 15% of the net tax due for each month (up to five months), with a maximum penalty of 75% of the unpaid tax. Similarly, the penalty for filing a fraudulent tax return (e.g. failing to report income) is 75% of the underpayment amount.

The penalties for criminal tax evasion are steeper. Under code 7201, a taxpayer found guilty of willfully attempting to evade tax (or its payment) could face a fine of $100,000 ($500,000 for a corporation) plus five years of imprisonment. Similarly, if a taxpayer is found to have willfully failed to pay tax, file a return, keep sufficient records, etc. he or she may face a penalty of $25,000 ($100,000 for a corporation) plus one year in prison.

Moreover, civil tax fraud and criminal tax fraud have different statute of limitations. For civil tax fraud, there is no statute of limitations, and the tax may be assessed at any time. By contrast, there is a criminal statute of limitations, but it applies only to the prosecution of the crime—the actual tax evasion—not the assessment of the tax owed. Typically, the statute is three years after the taxpayer commits the offense. But there are certain, specified carved out offenses for which a six-year statute of limitations applies.

Finally, different defenses are available for civil tax fraud and criminal tax fraud. When a civil suit for tax fraud follows a criminal proceeding for tax fraud, the doctrine of “collateral estoppel” may apply. Under this legal theory, provided certain technical requirements are met, once an issue is decided in one proceeding, it may not be retried again in a second proceeding.

This doctrine may be helpful to either the government or the taxpayer, depending upon the order of the civil/criminal proceeding and the outcome of the first case.

Consider first a criminal proceeding followed by a civil proceeding. If the government wins the criminal tax evasion suit, the taxpayer generally is “collaterally estopped” in the second (civil) proceeding from contesting that he committed fraud. Why? Because the government already proved fraud “beyond a reasonable doubt” and for the civil suit it needs even less evidence than that (requiring only “clear and convincing” evidence).

Alternatively, suppose the taxpayer is acquitted of criminal tax evasion in the first suit. Does collateral estoppel help the taxpayer? Unfortunately for the taxpayer, no, it does not. The first suit showed conviction was not provable “beyond reasonable doubt.” It remains to be seen in the civil suit whether it can be established using the lower evidentiary standard of “clear and convincing evidence.”

Now consider the reverse order of the proceedings, with the government first bringing a civil suit and losing—and then tries to bring a criminal suit for tax fraud. Does collateral estoppel help the taxpayer? It may; the taxpayer may attempt to collaterally estop the government in the second (criminal) proceeding from asserting the existence of fraud. In other words, under this scenario the doctrine of collateral estoppel helps the taxpayer.

In sum, the differences between a criminal and a civil suit are huge. It is best to speak with a qualified tax attorney, like one of the partners at Milikowsky Tax Law, to help you walk through these important nuances before the situation gets out of hand.