This is one of the most commonly made mistakes around, up there with the use of aggravate meaning something other than to make a circumstance worse, mis-spellings of judgment, and the split infinitive (if anyone cares anymore). The term Irony has been largely abandoned from speech by most folk, and left to lie fallow in situational and dramatic waters. The difference between irony and sarcasm is very simple. Simply, sarcasm is a subdivision of irony. Sarcasm is irony used with the intent to wound the person to whom the remark is addressed.

Examples:
1. Irony
note: Bill and Alice have just seen a really appalling play. Both Bill and Alice are disappointed.
Bill: Well! What a worthwhile use of an evening!
Alice : Yeah.

2. Sarcasm
note: Alice hates Bill's travel books
Alice
: Yeah, I like, really dig your travel books, Bill. You're a really skillful author.
Bill Bryson : Oh.

In the Irony example, there was no sarcasm because Bill was not intending to wound Alice with his comment. He was using irony to remark that he felt he had wasted his evening at the theatre.
In the Sarcasm example, there was sarcasm because Alice used it to show Bill that she didn't like his books and thought that he sucked as a writer. There's irony too, but the tone of the delivery and the intention makes it sarcastic. She was being nasty.

That's the difference. OK?

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