Tax Fraud vs Tax Evasion: The thin gap that you must be aware of

We've all heard of tax evasion and fraud, but what exactly do these terms mean? Is evasion different from fraud? Yes! Contrary to popular belief, there is a difference between tax fraud and tax evasion. Both tax evasion and tax fraud can lead to hefty fines and prison terms.

Do tax evasion and tax fraud affect the nation’s economy?

Government revenue is primarily derived from taxes. Since the majority of the welfare measures undertaken by the government are funded by taxes, tax fraud, and tax evasion are serious threats because they impede economic development in a greater way. This results in a huge loss of revenue for the government, which leads to economic stagnation. Depending on the economic conditions, these tax evaders may even be able to buy the government with large amounts of black money. Moreover, tax evasion increases economic inequality by making the rich richer and the poor poorer.

In this article, we are providing you with a brief explanation of tax evasion and fraud, their consequences, the difference between the two, and the methods for defense and deterrence from penalties.

What is Tax Fraud?

Tax fraud involves evading tax laws or defrauding the IRS. This is when people intentionally provide wrong information on their tax returns. The types of fraud include:

1. Overstating their expenses.
2. Neglecting to report full income.
3. Not filing taxes.
4. Claiming to live in one state while living in another. 
5. Intentionally not filing your income tax return
6. Falsification of information
7. The preparation and filing of a false tax return
8. Excessive deductions and exemptions
9. Creating false documents
10. The use of a fake Social Security Number (SSN)
11. Maintaining two sets of financial records
12. Claiming a dependent exemption that does not exist

In addition to these examples, employers fail to withhold federal income tax from employee paychecks, hire an outside payroll service that does not give the funds to the IRS, and pay employees in cash without reporting the payments.

How Serious is Tax Fraud?

There is no jail time in many tax fraud cases, but the civil penalties can be substantial. Penalties for accuracy-related errors, failure to file penalties, interest on penalties owed, and underpayment penalties are among them. 

What is tax evasion?

Tax evasion, however, involves avoiding paying taxes through illegal means. Generally, tax evasion involves misrepresenting income or hiding it. There are several ways to do this, such as underreporting income, inflating deductions without proper evidence, hiding or not reporting cash transactions, or hiding money offshore.

Attempting to "evade or defeat any tax" law is a felony under the Internal Revenue Code. An individual convicted of tax evasion can be fined up to $250,000 ($500,000 for corporations) or imprisoned for up to five years, plus court costs.

The following are examples of tax evasion:

1. Failing to report income knowingly
2. Claiming less income 
3. Falsifying your business expenses or income to the IRS
4. Underpaying taxes on purpose
5. The amount of tax you claim on your return is less than the amount of tax you owe on the income you report

Tax Evasion Penalties and Jail 

You will receive a felony record if you are convicted of tax evasion. Additionally, you could face a penalty with a fine of up to $250,000 and up to five years in prison. (Corporations receive a tax exemption of $500,000). Further, you may be liable for legal fees associated with the case. 

A few popular incidents of tax fraud and tax evasion:

1. According to sources, earlier this month, a Spanish court ordered Shakira to stand trial for tax cheating.

In addition to being charged with tax evasion totaling more than 14.5 million euros, the 45-year-old pop diva might face up to 8 years in prison. Between 2012 and 2014, she reportedly failed to pay taxes. She argues that she has not spent more than 183 days in the country, which would qualify her as an official citizen, and has therefore chosen to contest the claims. [1]

2. Todd and Julie Chrisley were found guilty of federal charges 

A new indictment was filed against the Chrisleys in February of this year after they were initially indicted in August 2019. In a verdict released on Tuesday, a jury found them guilty of conspiring to defraud community banks of over $30 million in fraudulent loans, according to U.S.Attorney Ryan Buchanan in Atlanta. Julie Chrisley was also sentenced for wire fraud, obstruction of justice, and conspiring to defraud the IRS. [2]

TAX EVASION AND TAX FRAUD: WHAT'S THE DIFFERENCE?

Even though tax evasion and tax fraud are sometimes used synonymously, there are a few fundamental differences between them. Tax fraud carries a more severe penalty than tax evasion, although both are serious transgressions. When tax documents are falsified, tax fraud occurs. As a result, a felony charge is always filed. Tax evasion, on the other hand, is the act of using illegal methods to avoid paying your taxes. In this case, you may not have filed your taxes or may not have paid them at all.

Tax evasion and playing with the IRS are not games, as many taxpayers have learned the hard way by adjusting numbers or omitting specific tax information.

Methods for defense and deterrence from tax fraud & evasion

Insufficient evidence -

• The prosecution must generally prove that you willfully intended not to pay your taxes in order to convict you of tax evasion. 
• Insufficient evidence may be enough to dismiss a tax evasion charge if you prove that you forgot to file a tax return. 
• In addition, you can challenge the IRS to calculate your taxes incorrectly.

Statute of limitations  -

• A charge of tax evasion must be filed within a certain timeframe. 
• A tax evasion suit cannot be filed by the IRS after this time period has passed, regardless of whether there is sufficient evidence.
• Tax evasion charges must generally be filed within six years of the alleged offense. 

Entrapment -

• An innocent person is entrapped when the government forces them to commit a crime they wouldn't have otherwise committed. 
• Entrapment will not occur, however, if the opportunity is simply provided for a crime to be committed. 
• To find out what you can do if you were tricked into committing tax evasion, talk to an experienced attorney. 

Mistake -

• There is a clear distinction when using this defense. It may be possible to have a mistake defense if you make a mistake regarding the due date for taxes or what needs to be reported. 
• It is unacceptable to claim you didn't know you had to file taxes simply because you didn't know you had to. 
• A lawyer can tell you which type of mistake you committed since this is a fine line to draw.  

Insanity -

• An insanity defense is always possible, but it is difficult to prove in any court. 
• You can use this defense to claim that you were insane either when you committed the offense or during your trial. 
• An insanity defense has a low success rate and is unlikely to be effective in tax evasion cases. 

Intentional Conduct -

• In order to prove tax evasion, the government must demonstrate that the taxpayer intended to do so and was aware of the consequences of doing so.

Tax fraud and tax evasion are quite different and should not be taken lightly. There can be severe punishments for this, including jail time. The best way to avoid tax fraud or tax evasion charges is to have qualified knowledge about these two.

To guide you more about tax fraud, myCPE is going to host a webinar on the topic "Understanding Tax Frauds," by expert speaker Dr. Robert Minniti. In this webinar, the speaker will address the complete understanding of tax fraud, income tax fraud, red flags for tax fraud, detecting tax fraud, and the cost of tax fraud to the federal government. 

This webinar has a lot more things for all the professionals like Certified Fraud Examiners, EAs, ORTPs, MRTPs, and many more who are practicing in Fraud & Forensics, Internal Audits, Fraud Detection & Deterrence and etc. subject areas.

Click here to register and book your slot now!