Simply put, tax fraud is willfully attempting to circumvent or defeat the tax code so that one’s tax liability is reduced. Income tax fraud is often called tax evasion.
Tax fraud is set forth in 26 U.S.C. § 7206. Generally, tax fraud is a significantly more serious crime than tax evasion. Both tax fraud and evasion involve substantial penalties. However, tax fraud is typically a felony, the consequences for which include prison, fines, and civil penalties.
Tax evasion is a term that broadly describes actions by individuals, as well as corporations, firms, trusts, and other entities to avoid paying taxes by violating the law. Tax evasion typically involves taxpayers either concealing or deliberately misrepresenting the true state of their financial affairs to the IRS to reduce their tax liability. Tax evasion includes dishonest tax reporting. Under-declaring income, profits, or gains; or overstating deductions are forms of dishonest tax reporting.
Conversely, tax minimization is not income tax fraud. Every legal taxpayer has the right to lawfully reduce the amount of the taxes they owe.