Tax Fraud
Tax fraud is the willful attempt to evade or defeat tax. Civil fraud carries a 75% penalty on the underpayment. Criminal tax evasion can result in fines up to $250,000 and/or 5 years imprisonment. There is no statute of limitations for fraud.
Exam Tip
Civil fraud = 75% penalty. Criminal = $250K fine + 5 years. No SOL for civil fraud assessment. IRS burden = clear and convincing. Know badges of fraud.
What is Tax Fraud?
Tax fraud involves intentional wrongdoing to evade tax obligations. The key element is WILLFULNESS -- an intentional violation of a known legal duty.
Civil vs. Criminal Fraud
| Feature | Civil Fraud | Criminal Fraud |
|---|---|---|
| Penalty | 75% of underpayment | Up to $250,000 fine |
| Imprisonment | No | Up to 5 years |
| Burden of proof | Clear and convincing (IRS) | Beyond reasonable doubt (DOJ) |
| Statute of limitations | None | 6 years (criminal prosecution) |
Badges of Fraud
| Badge | Example |
|---|---|
| Understatement of income | Omitting cash receipts |
| Inadequate records | Destroying books |
| False statements | Fictitious deductions |
| Concealment of assets | Hidden bank accounts |
| Failure to cooperate | Refusing to provide records |
| Illegal income | Unreported income sources |
Fraud vs. Negligence
Negligence = lack of due care (20% penalty). Fraud = intentional and willful (75% penalty). The IRS bears the burden of proving fraud.
Exam Alert
Civil fraud = 75% penalty, no statute of limitations for assessment. Criminal = up to $250K/$500K fine + 5 years. IRS must prove fraud by clear and convincing evidence. Badges of fraud are circumstantial indicators.
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Related Terms
Statute of Limitations (Tax)
The IRS generally has 3 years from the filing date to assess additional tax. This extends to 6 years if more than 25% of gross income is omitted. There is no statute of limitations for fraud or failure to file a return.
Penalty Abatement
Penalty abatement is the removal or reduction of IRS penalties due to reasonable cause or first-time penalty abatement (FTA) relief for taxpayers with a clean compliance history.
Circular 230
Circular 230 is the Treasury Department publication that governs the practice of tax professionals before the IRS, establishing standards of conduct, penalties for violations, and rules for written tax advice.
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