The consequences of Tax Fraud and Tax Evasion
Avoidance of tax is not a criminal offense. “Tax avoidance” generally refers to legally permissible conduct to reduce one’s tax liability while “tax evasion” refers to willfully and knowingly fraudulent actions designed to reduce one’s tax liability. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means.
One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability within the parameters of the law. Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts of evasion might include deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.
If any part of any underpayment of tax required to be shown on a return is due to fraud, Code section 6663(a) of the Internal Revenue Code may impose a penalty of 75% of the portion of the underpayment due to fraud. In addition, if the IRS can show fraud, there is no statue of limitations.
What is the IRS Badges of Fraud?
Below are some of the items that the IRS may look at in attempting to determine if a taxpayer is committing fraud:
Just because one of the badges above is applicable does not necessarily mean that fraud is being committed. (for example, many types of businesses deal with cash transactions). The IRS and the courts will look at the badges, and overall fact pattern of each individual case to determine if fraud has occurred.
Freeman Tax Law and the IRS
We have decades of experience dealing directly with the IRS. If you have any questions concerning your past or current tax situation, please contact us.