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Tax Fraud vs. Tax Evasion: Can You Go to Jail for Owing Taxes?

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated June 4, 2023​

3 min. read​

tax fraud vs tax evasion

First things first: you probably won’t go to jail if you make an honest mistake on your taxes. But if you commit tax fraud, that’s another story.

Contrary to popular belief, tax fraud and tax evasion aren’t quite the same. Tax evasion is a form of tax fraud, and both can result in hefty fines and prison time. However, tax evasion is a far more severe violation of federal law.

Here’s a breakdown of tax fraud and tax evasion, along with a strategy to legally reduce your taxable income and liability.

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What is Tax Fraud?

Tax fraud is committed when you willfully avoid your legal obligation to pay income taxes. It can also occur if you take intentional steps to prevent the proper assessment of income tax.

How Do You Get in Trouble for Tax Fraud?

Here are some scenarios that could result in tax fraud:

  • Failure to file returns over time
  • Providing erroneous information to tax preparers
  • Underreporting income over several consecutive years
  • Creating fraudulent invoices, documents, records or client files
  • Concealing or destroying invoicing, documents or records
  • Transferring ownership of residential or commercial property to avoid tax consequences
  • Generating illegal streams of revenue
  • Lying to Internal Revenue Service agents

Please note that this list is not all-inclusive. Also, understand that you could be subject to civil penalties if you make an honest mistake that results in the improper calculation of your tax liability. It’s referred to as tax negligence and punishable by civil penalties. However, you will likely avoid being charged with a federal felony and facing prison time.

How Serious is Tax Fraud?

Many tax fraud cases don’t result in jail time, but the civil penalties could add up rather quickly. They include accuracy-related fines, failure-to-file penalties, interest on penalties owed, and underpayment penalties.

What is Tax Evasion?

As mentioned above, tax evasion is a form of tax fraud that places the burden of proof on the federal government. They must prove their case beyond a reasonable doubt with clear and convincing evidence. Furthermore, the statute of limitations is five or six years, depending on the alleged crime committed.

What is Considered as Tax Evasion?

For a tax crime to be classified as tax evasion, it must involve the use of illegal methods to conceal income or information from the IRS.

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Jail Time and Other Penalties for Tax Evasion

If convicted of tax evasion, you will get a felony on your record. You could also face up to five years in prison and a fine of up to $250,000. (This amount increases to $500,000 for corporations). Furthermore, you could be responsible for the legal fees resulting from the court case.

Examples of Tax Evasion

These scenarios could be viewed as tax evasion to federal taxing authorities:

  • Hiding income for illegal activities from the IRS
  • Concealing cryptocurrency profits
  • Omitting of income earned abroad
  • Making under the table payments to employees
  • Failing to report income earned from an all-cash operation

Tax Avoidance: A Legitimate Way to Reduce Tax Liability

Worried you’ll owe more in taxes than you can afford to pay? Instead of committing tax fraud or, even worse, tax evasion, consider tax avoidance. It’s a tax planning strategy you can use to legally reduce your taxable income, which lowers your tax liability.

The Difference Between Tax Evasion and Tax Avoidance and Tax Fraud

When you evade tax, you lie to authorities to avoid paying your fair share. But when you engage in tax avoidance, you make strategic but legal financial moves to avoid a steep tax bill.

Examples of Tax Avoidance

You can engage in tax avoidance by:

  • Taking advantage of deductions and credits when you file your federal and state returns
  • Making contributions to an Individual Retirement Account or 401(k) (up to the annual limit)

What You Can Do if You Owe Tax and You Can’t Pay

If you’ve filed your tax returns and can’t pay what you owe, there are options to shield you from penalties. The IRS offers the following forms of relief under the Fresh Start Initiative to help you avoid accelerated collection actions and resolve your tax debt.

  • Offers in compromise – the IRS allows you to settle unpaid tax debt for a percentage of the total outstanding balance
  • Installment agreements – available in the form of short-term or long-term payment plans that break your tax bill down into manageable chunks

It can be challenging to navigate relief options. However, an established firm can help determine which strategy is most ideal for your unique situation.

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