Is it Tax Evasion, Tax Fraud, or Tax Mistake? (with Examples)

Is it Tax Fraud, Tax Evasion, or Tax Mistake (Examples)

When a U.S. taxpayer files a tax return and learns later that there was some incorrect information in the return or missing from the return, oftentimes they will conduct research that will lead them down one (or several) rabbit holes, incorrectly leading them to believe that they may have actually committed tax fraud or tax evasion — which is highly unlikely. That is because when a taxpayer makes a mistake with their filing, it is not tax fraud or tax evasion. Tax filing mistakes happen all the time, and fixing the mistakes is typically not a big issue. This is especially common with international tax and international information reporting, where the taxpayer only learns several years after the fact that they had an international reporting requirement or that income they earned overseas is taxable by the IRS — even if it is tax-exempt in the foreign country or even if they’ve already paid foreign taxes in the foreign country.

Let’s look at the differences between tax fraud, tax evasion, and tax mistakes with these 3 examples:

Tax Mistake Example

The taxpayer is a U.S. citizen who lives in a foreign country. The taxpayer worked and resided in the foreign country for several years and earned a pension. As the taxpayer begins retirement and begins receiving distributions from their foreign pension, they do not report this money as income because it is tax-exempt in the foreign country. In this situation, even though the taxpayer lives in a foreign country and the income is not taxable in the foreign country, because she is a U.S. citizen, she will presumably have to pay U.S. tax on that income in the United States. While the taxpayer may seek out a treaty provision to reduce or eliminate the tax, in general, many of these treaty provisions do not apply to U.S. citizens.

Tax Evasion Example

The taxpayer is a lawful permanent resident who lives in the United States with no intent of remaining in the United States beyond the next few years. Last year, the taxpayer inherited a 7-figure sum and is now generating 6-figures of passive income each year. Since the taxpayer plans on terminating their U.S. person status when they file their U.S. tax returns, they intentionally exclude the income from their tax return — even though they know it is supposed to be included on their U.S. tax return. Since the taxpayer knowingly excluded the income from the US tax return when they were aware it was supposed to be reported and then filed the tax return, this may be considered a form of tax evasion.

Tax Fraud Example

The taxpayer is a U.S. citizen who is living overseas. All the income that he generates is sourced in the foreign country, and he is tax compliant in that foreign country. He’s aware that he’s also required to file a U.S. tax return to report this income, but instead, he simply does not file a tax return for several years. In general, when the taxpayer fails to file a tax return when they know they are required to, this will be tax fraud (tax evasion typically requires the filing of a false return, although that is not always the case).

*With civil tax fraud specifically, it is very important to note that a violation can be civil and/or criminal. When it comes to civil tax fraud, there is no expiration of the statute of limitations, which means the IRS can go after taxpayers for several years after the fraud had occurred — even if it was the preparer who facilitated the fraud and not the individual taxpayer.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer misses the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.