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

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.