March 19, 2017

The line between tax negligence and tax fraud is unclear—even for the courts and the IRS. These are two different forms of illegal actions committed by taxpayers when filing out their tax returns, and carry different penalties under the law.

IRS auditors understand complex tax laws, and assume all tax returns have errors. Though these auditors are trained to find tax fraud, they do not start off suspecting it. They are likely to give you the benefit of the doubt, and will not chase after you if they are under the impression that you simply made a mistake. As a result, chances are slim you will be charged significant penalties for a simple error.

If the error is more serious, you may face allegations of negligence. Tax negligence comprises of several acts of carelessness in your tax return. Examples of careless mistakes commonly made are claiming too many deductions, overlooking sources of income, failing to report investment income, claiming the wrong dependents, and improperly classifying or failing to classify something as either income or a deduction.

These mistakes may have been unintentional, but it does not necessarily mean you will be freed from paying penalties. If you were careless on your return, you could be charged a 20% penalty on your tax bill. If you are found guilty of a tax fraud, however, you could face a heavy 75% civil penalty.

Tax fraud is an act performed willfully, with the intent to defraud the IRS. While most minor errors are considered as negligence, you could face allegations of tax fraud or criminal tax evasion if the error is serious enough or if there is reason to believe you purposely attempted to cheat on your taxes or evade your tax responsibilities.

Tax fraud can take the form of using a fake Social Security number, keeping two sets of books, falsifying tax documents, claiming dependents when you have none, or failing to file a return when taxes are owed. Auditors are trained to notice common forms of wrongdoing, known as badges of fraud. Some examples include freshly-made false receipts and checks altered to increase deductions. Not all these are conclusive signs of tax fraud, but they will raise red flags that will cause a tax representative to examine your return more closely or initiate an audit.

The main difference between tax negligence and fraud is intent. Tax fraud is a deliberate attempt to avoid paying taxes, and so the charges involve more serious penalties such as hefty fines and long prison sentences.

If the IRS accuses you of making an error on your return or failing to pay the full amount of what is owed, the outcome will likely depend on whether the IRS believes your actions to be intentional or accidental. It is uncommon to be convicted of tax fraud, but it can happen. It is crucial to obtain the assistance of a competent tax attorney as soon as possible.

Categories: Tax Fraud