The Difference Between Civil and Criminal Tax Fraud Compared

Contents

1 Comparing Civil and Criminal Tax Fraud Violations
2 IRS Civil Tax Fraud Definition
3 26 USC Section 6663
4 Internal Revenue Manual (IRM) Tax Fraud
5 Criminal Tax Fraud
6 About Our International Tax Law Firm

The Difference Between Civil and Criminal Tax Fraud Violations

Comparing Civil and Criminal Tax Fraud Violations

There are two main types of IRS Tax Fraud violations — civil tax fraud and criminal tax fraud. With a Civil Tax Fraud violation, the Taxpayer may be subject to hefty fines and penalties, but not incarceration (imprisonment) — although Civil Tax Fraud can have an unlimited statute of limitations, which means there is no expiration date for the US Government to pursue a Taxpayer for civil fraud (although in practice the US Government tends to keep civil enforcement within 6-years). On the other hand, Criminal Tax Fraud is a tax crime, such as criminally filing false or fraudulent returns which may result in imprisonment — along with monetary fines and penalties. While Tax Evasion is similar to Tax Fraud and often discussed interchangeably, Tax Evasion is a more serious charge — in that it is only criminal; (usually) requires an affirmative act — and generally results in longer incarceration than Tax Fraud. There are many different types of Taxpayer violations that can lead to a tax fraud investigations as well — and Taxpayers may be subject to both civil and criminal liability — which leads to complex fifth amendment considerations during civil tax investigations and especially eggshell audits. Let’s review the basics of the difference between civil and criminal tax fraud.

IRS Civil Tax Fraud Definition

It is important to note that when it comes to civil tax fraud (unlike other civil tax violations) the IRS must prove the fraud by clear and convincing evidence standard — and not mere preponderance of the evidence. While not specifically quantified, clear and convincing is thought of in terms of about 75%.

As provided by the IRS:

- - Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness.
  - In the case of a joint return, intent must be established separately for each spouse as required by IRC 6663(c). The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted only on one spouse, unless there is sufficient evidence that both spouses participated in the fraudulent act(s) resulting in the underpayment reported in their joint return.

26 USC Section 6663

The civil tax fraud penalty is codified under Internal Revenue Code section 6663(a) and provides the following (in pertinent part):

IRC 6663

- - - (a) Imposition of penalty If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.
    - (b) Determination of portion attributable to fraud If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.
    - (c) Special rule for joint returns In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

Internal Revenue Manual (IRM) Tax Fraud

As further provided by the IRM (Internal Revenue Manual) on matters involving civil tax fraud:

25.1.1.3 (01-23-2014) – Definition of Fraud

1. 1. 1. 1. Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.
      2. Tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:
        
        a tax due and owing; and
        
        fraudulent intent.

25.1.1.3.1 (04-22-2021) – Requirements of Proof

1. 1. 1. Understanding the requirements of proof is essential in establishing fraud. In all criminal and civil tax fraud cases, the burden of proof is on the government.
    2. The major difference between civil and criminal fraud is the degree of proof required.
      
      In criminalcases, the government must present sufficient evidence to prove guilt beyond a reasonable doubt.
      
      In civil fraudcases, the government must prove fraud by clear and convincing evidence.

25.1.1.3.2 (04-22-2021) – Civil vs. Criminal

1. 1. 1. Civil fraud results in a remedial action taken by the government, such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as part of the unpaid balance of assessment.
    2. Criminal fraud results in a punitive action with penalties consisting of fines and/or imprisonment. Criminal penalties:
      
      Are enforced only by prosecution;
      
      Are provided to punish the taxpayer for wrongdoings; and
      
      Serve as a deterrent to other taxpayers.
    3. A tax fraud offense may result in both civil and criminal penalties. Restitution may be ordered in criminal tax cases pursuant to a plea agreement or a conviction under Title 18 U.S.C. and may be required as a condition of probation.

25.1.1.3.3 (01-23-2014) – Avoidance vs. Evasion

1. 1. 1. Avoidance of tax is not a criminal offense. 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.
    2. Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.
    3. Common evasion schemes include:
      - Intentional understatement or omission of income;
      - Claiming fictitious or improper deductions;
      - False allocation of income;
      - Improper claims, credits, or exemptions; and/or
      - Concealment of assets.

Criminal Tax Fraud

Criminal Tax Fraud is much more serious, since a guilty verdict can result in imprisonment. Just like any crime, the US Government must prove tax fraud beyond a reasonable double. There are any different types criminal violations that may result in criminal tax. Here are some of the more common types:

Criminal Violations

Criminal Statutes	Elements Necessary For Prosecution
Title 26 USC Section 7201 (Evasion) Felony	Willfulness Attempt to evade or defeat (usually involves concealment or deception) tax or payment thereof Tax deficiency
Title 26 USC Section 7202 (Trust Fund Violation—Willful Failure to Collect or Pay Over Tax) Felony	Willfulness Requirement to collect, truthfully account for, and pay over employment taxes Either failure to collect any tax or failure to truthfully account for and pay over any tax or both
Title 26 USC Section 7203 (Failure to File or Failure to Pay) Misdemeanor	Willfulness Requirement to file a return, pay an estimated tax or tax, maintain records, or supply information Failure to file a return, pay an estimated tax or tax, maintain records, or supply information
Title 26 USC Section 6050I in Conjunction with 26 USC Sections 7203 and 7206 (Trade or Business Required to File a Form 8300 for Receiving More Than $10,000 Cash) Felony	Willfulness Subject to reporting requirement relating to cash of more than $10,000 received in trade or business Evasion of reporting requirement by: Causing a trade or business to fail to file report, or Causing a trade or business to file false report, or Structuring transactions to avoid report
Title 26 USC Section 7204 (Employee Wage Statements) Misdemeanor	Duty to deduct and withhold employment tax or income tax (26 USC 3102(a), 3402(a) Duty to timely furnish to the employee a written statement showing specified information concerning the deductions (26 USC 6051) Furnishing a false or fraudulent statement to an employee, or the failure to furnish a statement to an employee at the required time and in the required manner Willfulness
Title 26 USC Section 7205 (False W–4) Misdemeanor	Duty to supply information to employer regarding income tax withholding (26 USC 3402(f)(2)) Furnishing false or fraudulent information or failure to supply information, which would require an increase in tax to be withheld Willfulness
Title 26 USC Section 7206(1) (False return) Felony	Making and subscribing a return or other document under penalties of perjury The return, statement or other document, which was false as to a material matter Belief that it is not true and correct as to every material matter Willfulness
Title 26 USC Section 7206(2) (Assisting in Preparation of False Return) Felony	Aiding or assisting in, procuring, counseling, or advising the preparation or presentation of a document in connection with matters arising under the internal revenue laws Document was false as to a material matter Willfulness
Title 26 USC Section 7206(4) (Removal or Concealment with Intent to Defraud) Felony	Tax imposed on property Property on which tax is imposed or will be imposed or levy is authorized Removal or concealment Intent to evade or defeat assessment or collection of tax
Title 26 USC Section 7206(5) (Compromises & Closing Agreements) Felony	Willful concealment of property or Willful withholding, falsifying and destroying records Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement.
Title 26 USC Section 7207 (Submission of False Documents) Misdemeanor	Wilfulness Delivery or disclosure to any officer or employee of the Internal Revenue Service of any list, return, account, statement, or other document Return, statement, or other document is false or fraudulent as to a material matte Knowledge of material falsity
Title 26 USC Section 7212(a) “Omnibus Clause” Felony	Corrupt effort, endeavor, or attempt To impede, obstruct or interfere with Due administration of Title 26
Title 26 USC Section 7212(a) (Corrupt or Forcible Interference) Felony or Misdemeanor	Use of force or threat To intimidate, impede or obstruct An officer or employee of the U.S. acting in official capacity under Title 26
Title 26 USC Section 7212(b) (Forcible Rescue of Seized Property) Felony	Forcible rescue or attempt to forcibly rescue Seized property Knowledge of seizure
Title 26 USC Section 7215 (Collection & Paying Tax) Misdemeanor	Taxpayer was a person required to collect, account for, and pay over income tax withholding on wages and FICA taxes Taxpayer was notified of the failure to collect, account for, and pay over Taxpayer failed to collect, account for, and pay over the taxes, while not entertaining a reasonable doubt as to whether the law required the taxpayer to do so, and the failure was not due to circumstances beyond the taxpayer’s control
Title 26 USC Section 7232 (Failure to Register) Felony	Fails to register in connection with taxable purchase -diesel fuel and special motor fuels, or Falsely represents that he is registered, or Willfully makes false statement in an application for registration.
Title 18 USC Section 2 (Principal/Aiding and Abetting) Felony or Misdemeanor	Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.
Title 18 USC Section 152(1) (Concealment of Property) Felony	Bankruptcy proceeding was in existence; Individual fraudulently concealed the property from the custodian; and Property belonged to the bankruptcy estate.
Title 18 USC Section 152(2) (False Oath or Account) Felony	Existence of a bankruptcy proceeding; Statement under oath; Statement must be false; and Statement was made knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11.
Title 18 USC Section 152(3) (False Declarations) Felony	Existence of a bankruptcy proceeding; Individual made a false declaration, certificate, verification, or other statement in relation to the bankruptcy proceeding; Statement was knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under Section 1746 of Title 28, in or in relation to any case under title 11.
Title 18 USC Section 152(4) (False Claims) Felony	Bankruptcy proceedings have commenced; Individual presented or caused to be presented a proof of claim in the bankruptcy; Proof of claim was false as to a material matter; and Individual knew the proof of claim was false and acted knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 11, in a personal capacity or as or through an agent, proxy, or attorney;
Title 18 USC Section 152(5) (Fraudulent Receipt of Property) Felony	Individual receives a material amount of property from a debtor Such transfer occurred after the filing of a case under Title 11; and Acts were done with the intent to defeat the provisions of Title 11.
Title 18 USC Section 152(6) (Extortion and Bribery) Felony	Individual gives, offers, receives, or attempts to obtain money or property, remuneration, compensation, reward, advantage, or promise for acting or forbearing to act in any case under Title 11; and Action was made knowingly and fraudulently.
Title 18 USC Section 152(7) Fraudulent Transfer or Concealment) Felony	Individual fraudulently transferred or concealed the defendant’s property or the property of another; an Such act of transfer or concealment was done with the intent to defeat the provisions of Title 11, or in contemplation of a case under Title 11.
Title 18 USC Section 152(8) (Destruction or Alteration of Recorded Information) Felony	Bankruptcy proceeding existed Individual concealed, destroyed, or mutilated the documents; Such documents related to the property or financial affairs of the debtor; and Individual acted knowingly and fraudulently.
Title 18 USC Section 152(9) (Withholding of Recorded Information) Felony	Bankruptcy proceeding existed; Individual withheld from the trustee entitled to its possession; books, documents, records, or papers; Such documents related to the property or financial affairs of the debtor; an Individual withheld the documents knowingly and fraudulently.
Title 18 USC Section 157 (Bankruptcy Fraud) Felony	Defendant devised or intended to devise a scheme or artifice to defraud; and For the purpose of executing or concealing such scheme or artifice or attempting to do so; Files a petition under Title 11; or Files a document in a proceeding under Title 11; or Makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under Title 11
Title 18 USC Section 286 (Conspiracy to Defraud the government with Respect to Claims) Felony	An agreement, combination, or conspiracy to defraud the United States By obtaining or aiding to obtain the payment of any false, fictitious or fraudulent claim.
Title 18 USC Section 287 (False Fictitious or Fraudulent Claims) Felony	Knowingly makes or presents (statute does not require that person providing false information to return discounter* who filed return actually file return to be guilty under 287) False, fictitious or fraudulent claim Knowing that claim filed is false, fictitious or fraudulent. Note: * Files return for a percentage of the refund.
Title 18 USC Section 371 (Conspiracy) Felony	The general conspiracy statute encompasses two distinct types of conspiracies; Conspiracy to commit any federal offense Conspiracy to defraud the United States or any agency thereof, which includes the Service Essential elements of a Section 371 offense are: Agreement by two or more parties To commit an offense against the United States; or, to defraud the United States or one of its agencies Overt act by one or more of the parties in furtherance of the agreement Requisite intent to defraud or to commit the substantive offense
Title 18 USC Section 1001 (False Statements) Felony	Either: Falsifying, concealing or covering up any material fact by any trick, scheme, or device; or Making false, fictitious or fraudulent statements or representations; or Making or using any false writing or document. Knowingly and willfully In a matter within the jurisdiction of a department or agency of the United States False matter was of a material nature.
Title 18 USC 1956 (Laundering of Monetary Instruments) Felony	Whoever, knowing that property involved in a financial transaction represents proceeds of a specified unlawful activity (SUA). Conducts such a financial transaction, which in fact involves proceeds of a SUA: A.i. with the intent to promote the carrying on of SUA; or ii. with the intent to engage in conduct constituting a violation of section 7201 or 7206 of the IRC; or B. knowing the transaction is designed in whole or in part: i. to conceal or disguise the nature, location, source, ownership, or control of the proceeds of SUA; or ii. to avoid a transaction reporting requirement under State or Federal law.

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