What is tax fraud versus negligence?

On Behalf of | Dec 16, 2020 | tax law | 0 comments

It is important to understand tax laws on a local and federal level. If you get into trouble for tax-related crimes, you could find yourself facing years of repercussions.

Of course, different tax crimes come with different potential penalties. For example, tax fraud and tax negligence have entirely different meanings and repercussions if you face conviction.

The definition of negligence

The Internal Revenue Service (IRS) discusses instances of negligence when handling taxes. The IRS understands that tax laws are often complex even for professionals. Because of that, they will count careless errors as genuine mistakes as long as they do not find evidence pointing toward fraud. They will attribute these mistakes to negligence: hence, tax negligence.

Signs of tax fraud

Auditors have training to look for features that distinguish genuine mistakes from real attempts to willfully evade tax law. The latter is what they consider tax fraud. Some signs of potential tax fraud include:

  • Concealment or transfer of income
  • Falsification of documents
  • Categorizing personal expenses as business expenses
  • Using fake social security numbers
  • Willfully underreporting income
  • Overstating exemptions or deductions

Generally speaking, there are multiple signs present when an individual is engaging in fraudulent behavior. A person guilty of tax negligence may make one or two mistakes, but they are often haphazard and do not seem part of a “bigger plan” to save money.

In some cases of negligence, you may pay 20 percent of the amount you underpaid. This is often a steep penalty. However, convictions for tax fraud are much more severe. These felony charges may result in a prison sentence of up to 5 years and up to $500,000 in fines.