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Navigating Tax Law: Differentiating Between Fraud and Negligence

Updated: May 21

Tax law is complicated and can be confusing. It can also be overwhelming to catch up on past-due tax liabilities when you’ve fallen behind. It can be a scary place to be.

It's important to understand the difference between making an honest mistake and intentionally trying to deceive the Internal Revenue Service (“IRS”). In this article, we will explain the differences between tax fraud and tax negligence. We will help you understand the consequences of each and how to fix most problems with your taxes.

Understanding Tax Fraud

Avoidance of tax is not a criminal offense as taxpayers have the right to reduce, avoid, or minimize their tax liability by legitimate measures. A taxpayer who avoids tax does not conceal or misrepresent facts but they do shape or pre-plan events to reduce or eliminate tax liabilities within the rules of the law.

Tax Fraud

On the other hand, tax fraud is a serious offense, characterized by deliberate actions to deceive the IRS and illegally minimize tax liabilities. When someone intentionally fails to report all of their income or knowingly claims false deductions and credits, they are committing tax fraud. This can involve a range of deceptive practices, including submitting a false tax return that misrepresents earnings or fabricating business expenses to reduce owed taxes.

Commonly, tax fraud is identified through signs of willful evasion. For instance, concealing assets or engaging in complex schemes to hide income sources are clear indications of fraud. The IRS takes such matters seriously, which could lead to criminal investigations that can culminate in hefty civil penalties or criminal charges, including imprisonment.

Individuals attempting to commit income tax fraud might willfully report less income than actually earned, claim personal expenses as business ones, or make false statements on their income tax returns. These deliberate attempts to undercut the tax system not only erode public trust but also defraud the government and law-abiding taxpayers. Therefore, persons accused of tax crimes may find it imperative to consult a tax attorney to navigate potential legal repercussions.

Tax Fraud Indicators

Unreported Income

False Deductions/Credits

Misrepresented Business Expenses

Deceptive Financial Records

Understanding Tax Negligence

Tax negligence is often mistaken as a minor oversight, but the IRS takes any deviation from tax compliance seriously. It embodies any acts of carelessness or simple mistakes in filing tax returns—whether due to incorrectly reported income or overlooked deductions. Unlike tax fraud, these are not intentional acts meant to deceive the IRS but rather honest errors or the failure to make a reasonable attempt to fulfill tax obligations.

Consider a few common scenarios:

  • Forgetting to include some income on your tax return

  • Claiming business expenses that are not fully substantiated

  • Making mathematical errors in calculations on your tax forms

Negligence in tax matters attracts civil penalties, and though not as grave as consequences for fraud, they can be costly. The typical accuracy-related penalty for negligence is about 20% of the underpayment that would have occurred with accurate filing, plus interest on the determined underpayment and associated penalty.

Remember, if you're uncertain about your tax situation, consulting a tax expert can help you avoid unintended pitfalls. In the case of any errors discovered after filing, amending your return promptly can help mitigate any potential penalties for negligence.

How to Catch Up on Taxes - Is There a Way Out?

Yes - There is a way out! Instead of intentionally avoiding paying your taxes, hiding from the IRS, or underreporting your income, you can make a plan to get out of trouble when tax negligence has occurred.

Falling behind on taxes can lead to serious consequences, but taking proactive steps can help you catch up and avoid further issues.

Firstly, assess the situation; determine how many years you're behind and gather any necessary documentation, such as W-2s and 1099s. If you're not sure where to start, consider consulting a licensed tax professional, like those who are employed by ATBS, who can provide professional guidance tailored to your case.

To catch up:

  1. File any delinquent returns immediately. The IRS generally requires the last six years of tax returns to be filed.

  2. Pay as much as you can when you file. This shows good faith and may reduce penalties.

  3. If you can't pay in full, explore payment options like an installment plan.

  4. Keep an eye on your mail for IRS notices and respond promptly.

  5. Maintain good records going forward to avoid recurring issues.

By staying diligent and seeking help from qualified professionals, you can navigate the complexities of tax compliance and minimize the risk of tax negligence or the more serious consequences of tax evasion.

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