Negligence Vs. Willful Tax Evasion: What’s the Difference and Why Does It Matter?

The difference between negligence and willfulness is critical in a lot of IRS cases – but especially when determining whether a taxpayer committed tax evasion or simply acted negligently.

Willful tax evasion is a crime, subject to significant penalties and imprisonment. Negligence, in contrast, is the failure to act with reasonable care, but it’s not a crime, meaning you may face penalties but never have to worry about legal repercussions.

Worried that you might be at risk of facing tax evasion charges? Want to learn more so that you can protect yourself? Then, read on for a discussion of the differences between willful tax evasion and negligence. Or contact a tax evasion attorney at the Timothy S. Hart Law Group for help today.

Key takeaways

• Negligence is unintentional. It leads to penalties but not criminal charges.
• Tax evasion is intentional. It leads to penalties and criminal charges.
• The distinction is critical in cases where auditors find significant errors on your tax return.
• Willfulness also comes up in situations involving civil penalties, such as civil fraud penalties, FBAR penalties, and trust fund recovery penalties.
• An experienced tax attorney can help protect you from allegations that you acted willfully.

What Is Tax Negligence?

Negligence is the failure to make a reasonable attempt to comply with the tax laws. It typically includes careless or unintentional errors in tax reporting or compliance. As a litmus test, you can identify negligence by asking, would a reasonable, careful person have done the same thing in the same circumstances? If the answer is no, you likely acted negligently.

However, to determine whether you may have committed tax evasion, you must also consider a second question: Did you act intentionally to evade taxes?

In terms of tax reporting, negligence can take a number of forms, including:

• Omissions – for example, forgetting to report interest from a 1099-INT.
• Careless mistakes – for example, typing an extra 0 when entering a number on a tax form.
• Sloppy recordkeeping – for example, not having the receipts to substantiate business expenses during an audit.
• Math errors – entering incorrect numbers due to miscalculations.
• Questionable deductions – for example, claiming deductions incorrectly due to a misunderstanding of the rules.
• Relying on inaccurate professional advice – relying on advice without a reasonable basis, such as taking advice from an inexperienced or unlicensed tax preparer.

Negligence is not intentional. But it’s still a punishable offense. However, it’s a civil offense subject to penalties, not a criminal offense.

What Is Willful Tax Evasion?

Willful tax evasion is the deliberate attempt to evade the payment or assessment of taxes. It occurs when someone takes an intentional and illegal action so they won’t owe or have to pay taxes.

It may include the following, but again, only if the act was committed intentionally:

• Not reporting all of your income
• Claiming false or inflated deductions
• Filing a false return
• Hiding assets to prevent the IRS from collecting tax due
• Paying employees under the table to evade payroll taxes

Tax evasion is always illegal. It can lead to felony charges, fines, and imprisonment. Tax evasion is a type of criminal tax fraud, outlined in IRC § 7201.

Tax fraud is a much broader category than tax evasion. It includes tax evasion and other attempts to defraud the government by reporting false information or deliberately omitting or concealing information. Unlike evasion, tax fraud can be criminal or civil.

The punishment for both civil and criminal tax fraud includes monetary penalties, but only criminal tax fraud can lead to jail time. In both civil and criminal cases, the key difference between tax fraud and negligence is willfulness.

Willfulness Vs. Negligence: Why the Distinction Matters

The distinction between willful tax evasion and negligence is critical because it determines whether you’ll face criminal charges or not. If the IRS believes you were negligent, they’ll assess penalties and potentially even ban you from claiming certain tax credits – but if the IRS thinks you willfully attempted to evade tax, they will refer your account to Criminal Investigation (CI).

Then, you’ll have to deal with:

• Criminal charges that may lead to imprisonment.
• High civil penalties and possible court-ordered restitution.
• Multiple counts of tax fraud or evasion, allowing the penalties to stack.
• Limited ability to negotiate payment plans or resolutions on taxes and penalties.
• Loss of professional licenses.
• Possible impact on immigration status, if applicable.

IRS penalties based on wilfulness

The concept of willfulness doesn’t just come up in cases of tax evasion. The IRS also considers willfulness when deciding how to assess:

• Civil fraud penalties: Even if the IRS doesn’t pursue criminal charges, willful actions can increase the penalties you owe after an audit.
• FBAR penalties: Willful FBAR penalties are 10 times higher than non-willful FBAR penalties.
• Trust Fund Recovery Penalties: Only responsible parties who acted willfully can face this penalty, related to unpaid payroll taxes.

If you’re facing any issue that relies on the distinction between willful and non-willful actions, you should consult with an experienced tax attorney.

Key Differences Between Negligence and Willfulness

As indicated above, the exact same action can have extremely different consequences based on whether it was willful or negligent. So, what’s the difference?

• Intent: Negligence is a mistake or a careless action. Willfulness is intentional. It’s a deliberate act taken to lead to a certain outcome.
• Burden of proof: The IRS must establish that you acted willfully if they want to pursue criminal charges or assess a civil penalty based on willfulness. They look at a variety of methods of proof. Negligence, in contrast, carries a much lower burden of proof. It’s often established implicitly, as you’re required to exercise reasonable caution, especially when dealing with taxes on business or investment income.
• Penalties: Willful behavior always leads to higher penalties than negligent behavior. Willful tax evasion can also lead to imprisonment, whereas negligence isn’t criminal.

An example of negligence vs. willful tax evasion

To illustrate, let’s look at two situations where a taxpayer failed to report $100,000 in business income.

• In the first situation, the taxpayer made a typo when reporting their business revenue on their tax return – instead of entering $900,000, they entered $800,000.
• In the second situation, the taxpayer didn’t deposit $100,000 in cash received by their business and spent the cash on personal expenses. They also didn’t note the $100,000 in their bookkeeping records, but they emailed their business partner about the funds.

The first example is clearly negligence – the taxpayer should have exercised a greater level of care when preparing their return. However, they were not intentionally trying to defraud the government. The second example shows willfulness. The taxpayer made several decisions and took several actions to hide that income from the IRS, and based on their correspondence with their business partner, they knew what they were doing. It wasn’t just negligence; it was willful fraud or evasion.

Penalties for Negligence and Willful Tax Evasion

The penalties for negligence and willful tax evasion are significantly different.

• Negligence – accuracy-related penalty of 20% or 40% of the underreported tax.
• Tax evasion – up to $100,000 fine ($500,000 for corporations), up to five years imprisonment, civil fraud penalty of 75% of the undeported tax, legal costs, and possible restitution costs.

Accuracy-related penalties for negligence

In cases of negligence, the 20% penalty usually applies. For example, if you file a return showing that you owe $200,000 but you should owe $300,000, you’ve underreported $100,000 in tax, and the 20% penalty will be $20,000.

However, the 40% penalty applies in cases where you acted negligently and:

• Made a gross valuation misstatement – that applies if you report an asset’s value as 400% or more or 25% or less of its actual value. For example, you write off a $10,000 business asset as if it’s worth $40,000 or more.

What if I acted willfully, but the IRS can’t prove tax evasion?

The IRS may pursue criminal charges under one of the other tax fraud statutes, rather than pursuing tax evasion charges. Often, it’s easier for the Department of Justice (DOJ) to prove that you filed a fraudulent document than to prove that you made a deliberate attempt to evade taxes. Both charges involve willfulness, however.

What if I acted willfully but not criminally?

Then, the IRS may pursue civil tax fraud penalties instead of criminal tax fraud or evasion charges. Civil tax fraud penalties are 75% of the unreported tax.

What if I made a mistake but didn’t act negligently?

The consequences depend on the nature of the mistake and how it affected the tax liability reported on your tax return. For relatively small errors, you may be able to avoid the 20% accuracy penalty by proving that you made a mistake and were not negligent.

However, the situation changes in cases where you significantly understated your tax liability. Even if the IRS cannot establish negligence, they can assess an 20% accuracy penalty if you:

• understated your individual tax liability by the greater of $5000 or 10% (5% if you claimed a QBI deduction).
• understated your corporate tax liability by the lesser of 10% (or if greater, $10,000) or $10 million.

The IRS can escalate to the 40% accuracy penalty in cases involving:

• undisclosed foreign financial assets.
• underpayment attributable to one or more non-disclosed non-economic substance transactions.

How a Tax Attorney Can Help

A tax attorney can help you ^[a] understand the distinctions between willful and negligent behavior, and when representing you in front of the IRS, they can:

• Establish that you made an error but didn’t act negligently.
• Prove that your actions were negligent but not willful or criminal.
• Convince the IRS to deal with fraud on a civil level rather than pursue criminal charges.
• Communicate with the IRS to reduce the risk of escalation.
• Protect your rights.
• Provide criminal defense if you’re facing criminal charges.
• Apply for penalty waivers or reductions.
• Negotiate with auditors, revenue officers, or other IRS employees.
• Appeal IRS decisions as needed.

The IRS has teams of lawyers representing its interests. When you hire an attorney, you protect yourself and level the playing field.

Contact Us for Help

At the Timothy S. Hart Law Group, we focus on tax resolution and have experience representing taxpayers facing all kinds of concerns with the IRS and the NY DTF. If you’re facing penalties, potential criminal exposure, or other issues, contact us for guidance today.

FAQs

What if I made a mistake on my taxes but didn’t mean to?

Consult with a tax attorney or CPA. Depending on the nature of the mistake, you may need to amend your return or take other actions. However, you should be aware that the IRS may see your mistake as negligence, especially if it’s significant or discovered during an audit, which can increase your risk of penalties.

Can I fix errors before the IRS finds them?

Often, yes, but not always. Sometimes, the IRS will detect an error, adjust your return, and send up a notice about the changes. In other cases, you may find the error first and rectify it by amending your return or taking other actions.

Can you go to jail for tax negligence?

No, negligence puts you at risk of penalties, not criminal charges or imprisonment. The only way you can face prison for tax issues is if you commit a tax crime, such as tax fraud or evasion, which requires willful intent, not just negligence.

How does the IRS prove intent?

The IRS looks for actions it considers to be “badges of fraud” – for example, keeping two sets of books (one for personal records and one for filing tax returns) indicates an intent to evade tax. Similarly, concealing bank accounts or assets, lying to auditors, or unnecessarily conducting business in cash to avoid a paper trail can all signal intent.

What should I do if the IRS accuses me of fraud?

Find an experienced tax attorney to represent you. Make sure they have experience representing clients facing civil fraud penalties and criminal tax fraud or evasion charges. Because the stakes are so high, you should not talk with the IRS until you have secured legal counsel. Don’t just ignore them, though, especially if you’re already working with an auditor or a revenue officer – let them know you’re getting representation.