Tax evasion and fraud are two very different financial crimes, yet many people confuse the two. Both constitute illegal activities, but there are several distinct differences. In this blog, we will explore the differences between tax evasion vs tax fraud and discuss the consequences of each crime.
Definition of Tax Evasion and Fraud
Tax evasion is the deliberate attempt to avoid paying taxes by illegally hiding or underreporting taxable income. It is a misdemeanor crime and is often punishable with fines and/or imprisonment. Fraud, on the other hand, is the intentional use of false information to deceive or cheat another person or entity. This type of crime is a felony and is typically punishable by more severe sentences than tax evasion. You can know more about it by consulting a tax consultation service.
Motive
The difference between the two lies in motive. Tax evasion is the willful act of not paying taxes due to the government. At the same time, fraud is the intentional misrepresentation of financial statements or other documents to gain an unfair advantage. Tax evasion is typically motivated by financial gain, as the individual or business evading taxes is attempting to avoid paying their taxes to save money. Fraud, on the other hand, is typically motivated by a desire to gain an advantage over a competitor or access government funds or resources.
Intent
Tax evasion requires the intent to avoid or reduce one’s tax liability. The taxpayer must know that what they are doing is against the law and that they are trying to reduce their taxes. Fraud, however, requires the intent to deceive or cheat another person or entity. The perpetrator must know that their actions are wrong and that they are attempting to gain something they do not have the right to have.
Taxable Income
Tax evasion involves the underreporting of taxable income. This means that the taxpayer is not reporting all of the income they are legally required to report. Fraud, on the other hand, involves the misreporting of income. This means that the perpetrator intentionally misrepresents their income to gain something they are not entitled to.
Evidence
While both are illegal activities, the evidence required to prove their existence differs. Tax evasion is easier to prove because the authorities can use financial records to establish that taxes have not been paid. Fraud, on the other hand, requires more comprehensive evidence, such as witness testimony and documents that prove the intent to deceive. Both tax evasion and fraud can result in serious consequences, including fines, jail time, and the seizure of assets.
Punishment
Tax evasion is often punished with a hefty fine and jail time. In extreme cases, a person can be charged with a felony and face up to 5 years in prison. Additionally, the IRS can collect the taxes you owe and add penalties and interest to the amount. Tax fraud, on the other hand, is considered a more serious offense and carries much harsher penalties. Depending on the severity of the offense, you could face up to 15 years in prison and steep fines. The IRS also has the ability to charge you with a felony, which carries an even heavier punishment.
Prevention
Tax evasion is the more serious of the two offenses. It is typically committed by individuals or businesses who willfully fail to report income or deductions to reduce their overall tax liability. This can include underreporting income, overstating deductions, or claiming deductions that do not exist. Tax fraud, on the other hand, is a false statement made to the Internal Revenue Service (IRS) or other tax authorities to reduce the amount of taxes owed. This could include making false claims for deductions, credits, or exemptions; falsifying documents; or using a false identity to file a tax return.