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Income Tax: Fraud vs. Negligence

Income Tax: Fraud vs. Negligence


in IRS Info, Tax Info
Income Tax: Fraud vs. Negligence

Millions of Americans make mistakes on their tax returns each year. The IRS estimates that as many as 17% of all taxpayers fail to completely comply with the tax code in one way or another. Sometime, people do this intentionally, which is tax fraud. In many cases, however, this is completely accidental. So what is the difference between tax fraud and accidental negligence? What qualifies as fraud vs. negligence and how does the IRS react in either case? In this post, our experts at Tax Defense Partners take a closer look at income tax fraud versus income tax negligence.

What is Tax Fraud?

Tax fraud is any attempt to intentionally defraud the IRS. Tax fraud is actually a broad category that covers many circumstances. Income tax fraud, or tax evasion, covers more specific circumstances related to income tax.

If any of the following actions are done intentionally, they can be considered income tax fraud: failure to file a return, paying less tax than is due, false income reporting, claiming deductions or credits falsely, and filing a false return.

How is Negligence Different From Tax Fraud?

The main difference between negligence and tax fraud is intention. Tax fraud occurs when someone intentionally tries to defraud the IRS. Negligence occurs by accident. The IRS understands that the tax code can be very confusing for many people doing their taxes, especially if they are preparing their return themselves. If a taxpayer truly believed that they were filing their return correctly, the IRS deems this negligence rather than fraud.

How Does the IRS Determine the Difference Between Fraud and Negligence?

To determine whether a person has committed fraud or negligence, the IRS must look at intent. Once the IRS has noticed that there is an issue with a person’s taxes, they will examine them to look for fraud. IRS auditors are trained to look for signs of fraud and to differentiate these signs from honest mistakes.

If the IRS suspects tax fraud after their initial investigation, they will investigate further through their IRS Criminal Investigation branch.

Who Commits Income Tax Fraud?

Any type of taxpayer can commit income tax fraud. However, there are certain groups that do so at a higher rate. Namely, people who receive income that is not reported by a third party (such as your employer). This can include those in the service industry who receive cash payments and self-employed persons (especially those who receive cash payments).

Penalties for Tax Fraud

Tax fraud is a serious issue and, therefore, the IRS has strict penalties in place. Different types of tax fraud come with different maximum penalties. The penalties for three common types of income-related tax fraud are listed below.

Attempt to Evade or Defeat Tax

If a person is convicted with this type of tax fraud, they’re guilty of a felony and can be subject to the following penalties:

Up to 5 years of imprisonment
A fine of up to $250,000 for individuals or up to $500,000 for corporations
Or both of the above, plus the costs of prosecution

Fraudulent or False Statements

If a person is convicted with this type of tax fraud, they’re guilty of a felony and can be subject to the following penalties:

Up to 3 years of imprisonment
A fine of up to $250,000 for individuals or up to $500,000 for corporations
Or both of the above, plus the costs of prosecution

Willful Failure to File Return, Supply Information, or Pay Tax

If a person is convicted with this type of tax fraud, they’re guilty of a misdemeanor and can be subject to the following penalties:

Up to 1 year of imprisonment
A fine of up to $100,000 for individuals or up to $200,000 for corporations
Or both of the above, plus the costs of prosecution

Penalties for Negligence

Though negligence is accidental, it still comes with a possible IRS penalty. However, the penalty for negligence is much more lenient than the ones for tax fraud. If the IRS has determined that a taxpayer made mistakes as a result of negligence, they may fine the taxpayer up to 20% of the amount they unwittingly did not pay.

Get Help With Income Tax Issues

Unpaid taxes or incorrect returns can lead to a host of problems, including contact from the IRS. If you’re dealing with the stress of an IRS notice or IRS investigation, contact Tax Defense Partners for a free consultation. Our team of licensed CPAs and IRS Enrolled Agents can help you discover your options and get relief from your tax issues.