Tax Fraud vs. Negligence

March 4, 2018 | Tax Fraud

Tax Fraud vs. Negligence

I often receives phone calls from potential clients that are worried that either 1) their tax return has exaggerated expenses or lacks all the income, or 2) they took tax credits that they were not entitled to take.  Often the taxpayer went to a tax preparation firm, and did not review what the person included on the tax return. This is obviously a big mistake, since the taxpayer is solely liable for the information included on their income tax return. The main question asked is 1) Will I be audited and the issue found, and 2) Will I get fined or will I go to jail.

How is Tax Fraud vs Negligence Determined

The positive news is that unless the issue is substantial, you are not headed to jail. The bad news is that the civil penalties can be so large that perhaps you wish you only had to go to jail. The chances of being held liable for criminal conduct are low, but the conviction rates are very high so its not worth the risk to intentionally under pay your taxes. The cases of tax crimes are broad in scope, but I often see small businesses who collect but don’t remit sales tax as the most likley to face to criminal tax problem. If you find yourself in this situation, there is programs available to become compliant and pay back what you owe, and hopefully avoid penalties are together. To understand the difference of  tax fraud vs negligence, it helps to define each. The IRS define tax fraud as “an intentional act, with specific purpose to evade paying tax”. If you do not file your taxes at all, that can be better than filing with wrong numbers from my experience. Also, if you make a mistake on your tax return, that would not be a crime. The term negligence means that you did not make a reasonable effort to file a correct return. Its not a perfect defense, but if proven it keeps you away from being labeled a criminal by the IRS. Negligence can take the form of not keeping records, using deductions that are total estimates, and taken tax credits when you don’t qualify. The tax laws are confusing, so a negligence defense does have merit in many cases. Therefore, honest mistakes are not criminal, but the fines can still be substantial.

Legal Tax Reduction vs Tax Fraud

You may see ads from tax experts on how to avoid paying taxes. It is important to note that avoiding taxes can be different than evading them. To avoid paying taxes through proper tax planning is legal and fine to do. A good example is creating a 401(k) type account and deferring income into that account in order to lower your taxable income, or given money to charity. It is completely legal, and a good idea to keep searching for tax deductions, since you often spent the money and just need to prove it was business related. Therefore, there are a lot of methods to lower your tax bill without taking illegal measures to lower your tax bill.  

Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]