Distinguishing Tax Fraud from Negligence

  • May 14 2017

Unintentional tax filing errors are fairly common despite the good intentions of taxpayers. The primary issue separating negligence from fraud is the intent of the taxpayer. Income tax fraud constitutes a willful attempt to defraud the IRS and, as is discussed below, the IRS has multiple ways of distinguishing between fraud and negligence. Common methods of tax fraud include:

  • The intentional failure to file an income tax return
  • The intentional failure to pay taxes owed
  • The intentional failure to report all income
  • The preparation and filing of a false tax return
  • The use of multiple sets of financial ledgers
  • The falsification of expenses
  • The use of a false social security number
  • The use of improper tax exemptions
  • The use of improper tax deductions
  • The falsification of financial documents

As stated above, it is the intent of the taxpayer that determines whether an act constitutes fraud or negligence. The IRS understands that the Internal Revenue Code is complicated and that people may make mistakes when filing their taxes. Nonetheless, while the IRS can ordinarily tell when an error is the result of negligence, it is important for taxpayers to exercise the utmost caution when preparing their yearly tax returns, as even the unintentional appearance of impropriety could lead to a criminal investigation.

Tax Fraud Penalties

The IRS investigates alleged violations of the tax code through its criminal investigation unit. IRS criminal investigation agents investigate tax crimes, money laundering, and other criminal violations via a variety of sophisticated techniques. It is through these different methods that investigators distinguish between tax fraud and negligence. When tax fraud is uncovered, violators are subject to both criminal and civil penalties. Penalties associated with different types of tax fraud include:

  • Tax evasion: Tax evasion, a felony, is punishable by fines ranging from $250,000 to $500,000 and up to 5 years in prison.
  • Tax fraud and false statements: Tax fraud and false statements, both felonies, are punishable by fines ranging from $250,000 to $500,000 and up to 3 years in prison.
  • Willful failure to file a tax return, supply information, or pay appropriate taxes owed: These violations are misdemeanors and they are punishable by fines ranging from $100,000 to $200,000 and up to 1 year in prison.

The consequences of a tax fraud conviction can be devastating. If you’ve been charged with tax fraud of any kind, it’s imperative that you engage the services of an attorney experienced in both tax and criminal law in order to achieve the best possible outcome in your case. Please contact us for a free consultation at (720) 897-1550 or (888) 694-2093 (toll-free).

Posted in: Tax Law