Section 6653(b) of the Internal Revenue Code imposes substantial civil penalties for underpayment of tax if theres fraud.
Section 7201 of the Code imposes criminal penalties on “[a]ny person who willfully attempts in any manner to evade or defeat any tax.”
Although neither of these key concepts “fraud” or evasion” are anywhere defined in the Internal Revenue Code, the law considers them the same: in practice, civil “fraud” amounts to criminal “evasion,” and vice versa. But that s only the beginning. Fraud and evasion may be the same, but what are they?
First, remember that for the government to make a fraud/evasion case stick, there must be a tax deficiency. There must be some additional tax owed, arising either from overstated deductions being disallowed, or from allegedly understated (or unreported) income.
As to understated (or unreported) income, there are at least two possibilities. One is to show that it was legitimately excludable from gross income. Another is to show the existence of available, but not taken, deductions which would have reduced the taxable income and eliminated the alleged tax deficiency .
As to deductions, there are a host of Internal Revenue Code sections, I.R.S. Regulations, and civil and criminal case decisions dealing with the often extremely complex subject of tax deductions. These deductions have to be fought for vigorously not only because, if allowed, they could eliminate any tax deficiency (and thus any fraud/evasion charge), but also because a vigorous fight bears on my next point, willfulness. More
