Nick Lotito & Seth Kirschenbaum

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Tax fraud or negligence? The difference matters

As April 15th descends like a cloud upon tax-paying Americans, individuals and corporations alike are scurrying to get all of their ducks in a row. Figures involving income, expenses, deductions, dependents, etc. must all be tracked down, categorized, organized, and reported.

It probably won't surprise you to learn that not every tax return submitted to the IRS is 100% correct and conforms perfectly to the tax code. But these errors can be divided into two basic categories: intentional and unintentional. And that is essentially the difference between tax negligence and tax fraud.

What is tax negligence?

Even IRS workers have hearts beating in their chests; they realize that tax laws are a labyrinth of legalese and ever-changing regulations and technicalities, and even the most sincere taxpayer with nothing but good intentions can make an error. Although auditors are trained to look for tax fraud, they don't assume it when reviewing every return. If errors are found, they usually give the filer the benefit of the doubt and assume it was an honest mistake. An honest, or unintentional, error is considered tax negligence.

Honest mistakes, however, carry penalties. A careless mistake on your tax return can result in 20% being added to your tax bill. Although unpleasant, this is a slap on the wrist compared to the penalties for tax fraud.

What is tax fraud?

Simply put, tax fraud is willful evasion of tax laws. While it's not always easy to discern the difference between negligence and fraud - it's all a question of motive - auditors are trained to find "badges of fraud" that indicate an intentional effort to deceive the IRS. Some of these are:

  • Overstatement of deductions and exemptions
  • Preparing or filing a false return
  • Concealment or transfer of income
  • Falsifying tax documents
  • Falsifying personal expenses as business expenses
  • Keeping multiple sets of financial ledgers
  • Using a false Social Security number
  • Claiming exemptions for dependents that do not exist
  • Underreporting income
  • Failing to file a return

Penalties for Tax Fraud

Depending on the type, tax fraud is either a misdemeanor or a felony. A felony conviction can result in up to five years in prison, hefty fines, or both. Felonies include attempts to evade or defeat paying taxes and making false statements.

A misdemeanor conviction can result in prison time and fines as well, although not as severe as those for felonies. Misdemeanors include willful failure to file a return, supply information, or pay taxes on time.

Get help

If you are being investigated for tax negligence or fraud, don't try to go it alone. Seek the help of a qualified, experienced attorney. Penalties can often be reduced or avoided altogether if legal representation is obtained as soon as possible.

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Nick Lotito & Seth Kirschenbaum

Former Federal Prosecutors

918 Ponce de Leon Avenue, N.E. Atlanta, GA 30306 Phone: 404-692-5168 Fax: 404-872-1622 Atlanta Law Office Map