Tax Fraud and Tax Evasion Laws and Penalties

Few people enjoy paying taxes, but most pay anyway. Other people choose a different strategy, opting to try to get out of paying taxes by using illegal means. While there are numerous ways to minimize your tax obligation through legal methods (called "tax avoidance"), unlawful methods can result in civil penalties, as well as criminal penalties. Using fraudulent or illegal means to avoid paying taxes is generally referred to as "tax fraud." Tax evasion is considered one of the more serious tax fraud crimes.

Below, we'll review what acts are considered federal tax fraud and tax evasion and the penalties for these wrongs.

What Is Tax Fraud? What Is Tax Evasion?

Tax fraud typically involves lying or omitting data on a tax return to lower taxes or avoid owing or paying taxes. Common tax fraud violations include underreporting income, overestimating expenses or deductions, failing to collect employment taxes, making false statements to tax investigators, violating employer withholding requirements, claiming a tax refund when none is due, or not filing a yearly tax return. Tax evasion is one type of tax fraud.

Most tax fraud cases can be divided into two types: civil or criminal. Civil cases usually arise from taxpayer negligence but can rise to the level of fraud. Criminal cases involve willful or knowing bad acts. Depending on the circumstances, the government can seek either a civil or criminal penalty or both.

Civil Tax Cases

In civil cases, the government claims that the taxpayer made a mistake, calculation error, or acted negligently in the preparation and filing of their taxes. The most egregious civil cases rise to the level of fraud. Civil cases can result in monetary penalties (but no jail time).

Criminal Tax Cases

In a criminal case, the government accuses the taxpayer of taking intentional actions in order to avoid having to pay their true tax liability. Criminal cases are much more serious and involve the possibility of substantial fines as well as prison sentences. For a criminal conviction, the prosecution must prove all elements of the crime beyond a reasonable doubt.

What Are the Criminal Penalties for Tax Evasion?

A person commits the crime of tax evasion by willfully attempting to evade a tax or payment of a tax. Usually, tax evasion occurs by filing a false return that omits income or wrongly claims deductions. To be found guilty of tax evasion, a prosecutor must prove that the taxpayer acted with an intent to defraud, committed some affirmative act (like filing a false return), and owes taxes.

A conviction for tax evasion under federal law carries up to five years in federal prison and a criminal fine of up to $250,000. In addition, the defendant will have to pay prosecution costs and owed taxes.

(18 U.S.C. § 3571 (2022); 26 U.S.C. § 7201 (2022).)

What Are the Criminal Penalties for Other Types of Tax Fraud?

There are a number of tax fraud crimes. Individual federal laws govern each type of criminal offense, and each of these has penalties associated with them. Below are some of the most common individual taxpayer crimes.

Willful failure to file a return, supply information, or pay a tax. This offense carries a misdemeanor penalty of up to one year in jail and a fine of $100,000.

Willful filing of a tax return or required documents containing false information. This offense is a felony. Examples of false information include inflating deductions or underreporting income. This crime requires that the person verify the documents under penalty of perjury. A person convicted under this section faces up to three years in prison and a fine of $250,000.

Knowing filing of a false claim for a tax refund. This offense also carries felony penalties. This crime falls under a section of law that makes it a crime to make false claims against the federal government. A conviction can mean up to five years in prison and a $250,000 fine.

(18 U.S.C. §§ 287, 3571 (2022); 26 U.S.C. §§ 7203, 7206 (2022).)

What Are the Civil Penalties for Tax Fraud and Tax Evasion?

A civil tax penalty typically arises after a tax investigator has noticed a problem with a tax return. The problem doesn't have to rise to the level of a crime. It can be anything from glaring mistakes to simple calculation errors or other problems. Civil tax cases may result in no penalty at all or may result in a variety of fines.

Degrees of Civil Tax Penalties

The civil tax penalty generally corresponds to the culpability of the offense. For example, forgetting to file a return will result in a 5% penalty based on the amount of taxes due per month. A 20% penalty applies if it's found that a taxpayer substantially underpaid taxes, usually through negligence or disregarding certain rules. The most severe civil penalty—75%—applies when a taxpayer commits fraud and underpaid taxes. (26 U.S.C. §§ 6651, 6662, 6663 (2022).)

Civil Fraud Penalty

The harshest penalty of 75% requires proof of both (1) fraud and (2) underpayment of taxes. Fraud generally involves an intentional wrongdoing committed to evade paying taxes. It can be shown by evidence that a defendant concealed assets, made substantial understatements of income, filed false documents, or lied to tax authorities. Underpayment means taxes are owed to the government.

Tax evasion. A conviction for tax evasion meets both requirements for the civil fraud penalty—fraud and underpayment of taxes. In other words, a tax evasion conviction provides the proof needed for the civil fraud penalty.

Other tax crimes. Other "tax fraud" crimes might result in the civil fraud penalty, but not always. Some of these crimes don't require proof that the taxpayer owes taxes to be convicted, meaning the second prong isn't met. For instance, filing false documents can be a crime regardless of whether taxes are proven to be due and owing. Other crimes (despite being lumped in as a "tax fraud" crime) don't require willful fraud, so they don't necessarily meet the first prong. Failing to file a return, for example, doesn't necessarily require fraud. Even if the conviction doesn't provide the needed proof, a prosecutor could still seek the penalty in civil court.

(26 U.S.C. §§ 6651, 6663 (2022).)

See an Expert

Tax fraud is never a situation you should take lightly. If you've been contacted by the IRS or are charged with a tax fraud crime, speak to a criminal defense attorney immediately. Tax fraud cases hinge upon the government's ability to build a case against you, and you can unknowingly cause yourself harm if you proceed without first consulting a lawyer. A local attorney will be able to advise you on your rights and provide counsel at every stage of your case, from investigation to sentencing and appeal.