What is the difference between civil and criminal tax fraud?

what is the difference between civil and criminal tax fraud

Tax crime in simple terms is an attempt to falsify or exclude documents when filing for annual taxes. If you committed tax evasion or tax fraud the IRS may prosecute you and it’s critical to understand the difference between the two to prevent further penalties and potential imprisonment. Today, we will be discussing the difference between criminal tax fraud and civil tax fraud.

Tax Fraud vs. Tax Evasion

Tax fraud is the willful failure of paying the tax required of you. Failure of paying taxes may further escalate to criminal tax evasion. Tax fraud and tax evasion are commonly interchanged and the IRS examines these two determining factors whether to pursue civil tax fraud or criminal tax evasion.

These differences depend on the circumstances and resources provided by the taxpayer and some other determining factors are:

  1. Unreported foreign accounts, income, investments, and assets
  2. Unreported or underreported income
  3. Fraudulent deductions
  4. Destroying relevant records
  5. Transferring and concealing assets

So, what are the differences between criminal tax and civil tax?

  • Proof – the first major difference between tax fraud and tax evasion is the proof. To impose a civil case, the IRS must prove “clear and convincing evidence” and needs civil liability. penalties may include re-assessment of the correct amount of tax due, paying civil fines, interest, and recoupment of the illegally-transferred assets. On the other hand, to press a criminal case, the IRS must prove tax fraud to be “beyond reasonable doubt”. When it is criminal, it is also referred to as “tax evasion“. The latter is known to be the highest standard of proof known to the law.
  • Penalties – the second major difference between the two is their penalties. Most criminal tax cases may result in a maximum of 5 years of jail time and a charge of $100,000 ($500,000 for corporations) Unlike criminal penalties, civil fraud penalties do not result in jail time. Although civil tax fraud does not carry the criminal offenses, civil penalties can still carry severe action. Civil tax penalties may result in a cost of 75% of any tax on top of the interest owed. The IRS also has the power to press additional charges. Thus, civil charges should not be viewed as the better option.

FYI – There’s actually a difference between tax avoidance and tax evasion (one is legal – the other is not).

Civil Tax Fraud

As mentioned above, civil tax penalties may amount to up to 75% of the taxes due. The IRS may also charge additional penalties. And by the way, tax penalties and interest are not tax deductible.

Criminal Tax Fraud or Tax Evasion

If the IRS presumes you acted and committed criminal fraud the IRS and Criminal Investigation Department may impose criminal tax penalties and pursue a criminal investigation.

Types of Tax Fraud

Tax fraud happens when a taxpayer or a company has done one of these:

  1. Intentional failure of paying taxes owed
  2. Intentional failure to pay federal income tax
  3. Failure to report all income
  4. Fraudulent claims
  5. Unpaid tax

Though the IRS acknowledges mistakes. However, the difference between intentional and negligent behavior depends on the situation. “Willfully failing is a huge factor in establishing fraudulent tax. Willful failing is a conscious, mindful and intentional tax fraud.

Thus, if the IRS does not find anomalies or evidence of criminal tax evasion or fraudulent failure the IRS may assume an honest mistake on your end. However, mistakes like this may still result in a 20% penalty, some cases may also need representation in court for resolution.

It is important to submit all tax information precisely and honestly and if you’re being assessed it is also equally important to know your right to an attorney as well.

Probable Defense Against Criminal Tax Evasion and Civil Tax Fraud

When facing allegations, there are several potential ways to file for defense in order to avoid civil and criminal prosecution. One effective way is to include challenging the government’s evidence. This may be done by asserting these things:

  • Unaware of incorrect tax returns
  • Unintentional submission of a false tax return
  • Unaware of the additional tax owed
  • Federal tax returns were correct

However, one thing you may never include in your defense is to claim you were misadvised by your experienced tax attorney or accountant.

Other Types of Tax Fraud

The IRS pursues taxpayers and companies who submit fraudulent tax returns and the IRS Criminal Investigation (CI) is pursuing other forms of tax fraud and tax-related money laundering. Some suites include:

  • Employment fraud and payroll tax fraud – Underreporting the number of employees and employment taxes withheld is one of the most common committed frauds in a company setting.
  • Tax refund fraud – A person may claim an unclaimed unearned tax refund and filing a false income tax return could result in tax litigation. This play may involve identity theft, fake deductions, and more.
  • Abusive Tax Schemes – multiple pass-through entities are used to evade tax. These can be characterized by the use of foreign financial accounts, trusts, offshore debit/credit cards, Limited Liability Partnerships and Companies, and the like.

How to Avoid Tax Fraud

  • Check credentials – checking credentials for preparers. You must ensure you are working with a qualified tax attorney or accountant. The IRS provides a directory for Federal Tax Return Preparers.
  • Experienced with the background – it is imperative to work with a preparer that has dealt with and responded to your needs.
  • On the dot – when you know you are having problems with your returns you must speak with your preparer right away.

Other Criminal Tax Fraud and Civil Tax Fraud Penalties

Civil tax fraud penalties are limited to monetary penalties and will not impose criminal fines. While criminal tax evasion suits may result in imprisonment and monetary penalty. Common civil tax fraud cases:

  1. Defrauding delinquency to file a tax return: 15% of the net tax due per month up to five months with a leading penalty of 75% of the unpaid tax
  2. Filing a defrauding tax return: 75% of the underpayment amount
  3. Tax evasion: This criminal offense is a maximum sentence of five years imprisonment and a fine of up to $100,000 for individuals or $500,000 for enterprises.
  4. Intentional failure to pay tax, neglect to file, or failure to keep sufficient records: This crime carries a maximum term of imprisonment of one year, accompanied by a potential fine of up to $25,000 for individuals or $100,000 for corporations.
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