Taxes What Is Tax Fraud? By Jake Safane Updated on November 15, 2022 Reviewed by Eric Estevez Fact checked by J.R. Duren In This Article View All In This Article How Tax Fraud Works Example of Tax Fraud What Tax Fraud Means for Individuals Frequently Asked Questions (FAQs) Photo: PeopleImages / Getty Images Definition Tax fraud is the act of intentionally and willfully trying to evade taxes, which can lead to both civil and criminal penalties. Key Takeaways Tax fraud involves knowingly committing a wrongdoing by trying to pay less tax than what’s legally owed according to the tax code.Tax avoidance differs from tax fraud, as the former involves taking advantage of legal strategies, like maximizing legitimate tax deductions.Committing tax fraud can potentially lead to criminal penalties, including fines and imprisonment How Tax Fraud Works Tax fraud involves willfully committing a wrongdoing to evade taxes that you owe. For example, someone might report less income than they know they truly earned to deceive tax agencies and pay less income tax. The IRS notes that "willfully" includes knowing that you're doing something wrong, intentionally doing what you did, and purposefully obscuring facts. Making an honest mistake on your taxes (like miscalculating) or being negligent (like failing to keep records) could potentially just incur a penalty. Still, tax fraud differs, as it is intentionally done by the taxpayer to illegally pay less money than they actually owe. Note Tax fraud differs from tax avoidance. Tax avoidance involves legally minimizing taxes, such as by taking full advantage of provisions in the tax code that allow you to deduct legitimate expenses. Normally, you owe income taxes on the money you earn, aside from adjustments like credits and deductions. But someone committing tax fraud might knowingly try to hide some of their income or assets in an effort to pay less tax. When you commit tax fraud, you could be prosecuted. In civil fraud cases, the government might try to collect the correct amount of tax owed plus penalties. But those who commit tax fraud can also face criminal prosecution. That can mean fines and/or potentially even going to prison for tax fraud. Example of Tax Fraud Someone committing tax fraud might keep a secret bank account and only report earnings that go into a known bank account. Or, to deceive tax agencies, a business owner might try to reduce their taxable income by claiming they paid $50,000 in advertising expenses when really they only paid $5,000. Note Tax agencies like the IRS can catch tax fraud through several means. An audit, for example, might reveal that a claimed deduction for a business expense was faked by the taxpayer. The IRS has access to certain records that might reveal tax fraud, such as a 1099 form that reports income from freelance or gig work that you chose not to report and tried to hide from the IRS. What Tax Fraud Means for Individuals Tax fraud is a serious issue, not only for moral reasons regarding paying your fair share of taxes but also because it is illegal. If you try to deceive the IRS or other tax agencies, you could face significant penalties or even go to prison. Keep in mind that trying to pay less than what you legally owe is very different from making legal, strategic tax-reduction decisions, like maximizing retirement contributions to tax-deductible accounts. So when it's time to do your taxes, you may want to work with a tax professional or use tax software that can help you find as many legal tax deductions and tax credits as possible. But avoid working with someone who encourages you to do something fraudulent, like underreporting your income. Frequently Asked Questions (FAQs) How serious is tax fraud? Tax fraud is a serious crime that can lead to fines and prison time. For individuals, the maximum fine and sentencing for tax fraud are $100,000 and five years. How do I know if I'm committing tax fraud? If you are knowingly giving the IRS unfactual numbers or information to evade paying taxes you owe, then you are likely committing tax fraud. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. “Accuracy-Related Penalty.” IRS. “Fraud,” Page 5-6. IRS. “Fraud,” Page 5-3. IRS. “Overview/Definitions,” See “25.1.1.3.3 (01-23-2014) Avoidance vs. Evasion.” IRS. “Fraud,” Page 5-7. Cornell Law School Legal Information Institute. "26 U.S. Code § 7201—Attempt To Evade or Defeat Tax." IRS. "Reporting Fraud and Abuse Within the IRS e-File Program."