Tax fraud, tax evasion, and money laundering can seem similar, if not the same, to laypeople. As a result, they assume the legal penalty for all three offenses is the same. But that’s not true.
Although tax fraud, evasion, and money laundering fall under the umbrella of tax abuse, they are not one tax crime with different names.
Knowing about each of the said schemes is essential in order to understand the legal repercussions of such an activity and to stay away from carrying a tax crime.
To help you better understand the three abusive tax practices, here is an in-depth guide.
Tax fraud or general tax fraud refers to the practice of underpaying or not paying taxes by using crafty techniques. Things such as:
- Underreporting income
- Not registering assets
- Having multiple accounts
- Filing false tax return claims
- Using forged documents to get exemption from paying taxes
- Bribing tax officers
- Citing personal expenses as business expenses
These are some common tactics used to carry out tax fraud.
The IRS (Internal Revenue Service) Criminal Division deals with the cases of tax fraud by looking for the following indicators
- Not reporting the actual income
- Not using one’s authentic social security number
- Using fake documents
- Willfully not paying taxes
If the IRS team doesn’t find any dubious clues suggesting that a person might have tried to run a fraudulent scheme to avoid payment, it attributes the underpayment to human error or unintentional mistake.
In that case, the accused has to pay 20% of the underpaid amount.
If found to be a tax fraud criminal, a person will face federal prosecutors.
The legal, financial penalties of tax fraud can amount to up to $100000 aside from jail time for five years in some cases. If the perpetrator is an enterprise, the amount of the fine can go up to $500,000.
On top of it all, the felon has to bear the cost of prosecution. Simply put, tax fraud is a severe unlawful activity that nobody should take lightly.
As the name implies, tax evasion refers to not paying the due taxes using deceiving means. It is a crime with harsh punishments.
Tax evasion often gets confused with tax avoidance. Although the two are different concepts.
Tax evasion is not paying the amount of taxes you are legally bound to/expected to pay. Whereas, tax avoidance, on the other hand, refers to reducing your tax liability to pay fewer taxes and amass wealth. Simply put, in tax evasion, a person deliberately pays less or no amount of taxes they owe. Whereas in tax avoidance, they get their liability (tax owed to the government) reduced.
Unlike tax evasion, tax avoidance is legally allowed. As well it is a common practice in the United States.
The Internal Revenue Code states the punishment for tax evasion.
According to section 7201 of the document. Any person who intentionally uses deceptive means to not pay the taxes will receive a fine of up to 100000. Or imprisoned for five years or both. The clause also declares that a tax felon had to bear the costs of prosecution besides the financial penalty.
Now, money laundering is a common fraudulent scheme used by taxpayers. They use it by employing various tricks to hide their wealth from the Internal Revenue Services. The most wildly employed tactic to launder money is to hide one’s income or make unlawfully acquired money legitimate.
In simple words, Money laundering is a tax abuse strategy that cuts in two ways.
You either turn your illegally gained revenue into lawful income, or you transfer your wealth and conceal all pieces of evidence of its existence. Either way, this is a deceptive technique, warranting legal action.
Becoming a federally recognized crime back in 1986, Money laundering is a serious offense in America. American law has two clauses that deal with money laundering and its consequences.
Sections 1956 and 1957
As per the section 1956
Any transaction carried out listed below falls under the category of money laundering.
- The intent to promote the unlawful means of earning income
- A motive of not paying taxes willfully
- The knowledge of the purpose behind, which is to disguise the location, source, beneficiary, and use of illegal capital gains
- With the intention to evade paying a due tax requirement
Moreover, the same section dictates all additional supplies used to launder money. Such as transportation, transmission, or safekeeping of funds, are also considered unlawful.
As per section 1957
Investing illegally obtained income in property through a financial institution while knowing the source of the capital is also an act of money laundering as it transforms unlawful revenue into a lawful asset.
Banks are not the only financial institutions before the law. The law also groups brokers, insurance companies, non-bank financing corporations, among many others, under the category of financial institution.
The United States Department of Justice manages prosecution for such crimes. The team that specifically looks into such matters is the Money Laundering And Asset Recovery Section (MLARS).
The law is clear on the penalty of cleansing black money; it gives a sentence of up to 20 years in prison or, in some cases, up to 10 years. Either way, imprisonment is certain. However, the actual number of years that a criminal has to spend in jail for converting illicit money lawful depends on the amount involved in the case.
Proving The Accused Guilty
While tax-related crimes are common and consistently on the rise in the USA. Proving people guilty of the offense is not as easy as concrete evidence. The Internal Revenue Services Criminal Investigation department has to dig deep. And search far and wide to gather evidence to declare them guilty. So, criminals often get off the hook because of the lack of indicting proof.
According to the statistics on tax-related frauds and crimes released by the IRS. They have conducted 5000 investigations in the past 3 years.
Considering the staggering figures, it’s safe to say that tax abuse is prevalent in the country. However, it’s a crime punishable by law, which is something every citizen should remember