Tax Fraud or Negligence? A Look at the Law

Confusion_Tax_CodesThe tax code, just like other laws and regulations in the nation, is constantly being updated to keep with the current times.  Unfortunately, decades of change have made the tax code vast and incredibly complex, meaning mistakes on tax forms are bound to occur.  Even the Internal Revenue Service admits this can happen from time to time.

It's worth pointing out at this time that not all failures to comply with the tax code are the result of mistakes made when filing taxes.  Sometimes not complying with the tax code is done intentionally, which is considered tax fraud and is illegal.  So how does the IRS determine whether an error is the work of negligence or tax fraud?  Let's take a look.

The IRS defines tax fraud as "the willful and material submission of false statements or false documents in connection with an application and/or return."  To make this determination, investigators will look for any indicators of fraud such as, but not limited to:

  • Underreporting income
  • Using a false Social Security number
  • Falsifying documents
  • Intentionally failing to pay taxes

If these common indicators are absent, the IRS typically assumes that an unintentional mistake has occurred due to negligence.  Though this typically does not lead to criminal charges for tax fraud, mistakes with your taxes can lead to an accuracy-related penalty that equates to 20 percent of the underpayment. 

Anyone could be caught off guard when they are assessed this penalty, which is why it's important to make sure all tax information is accurate and truthful before submitting it to the IRS.  It's also important to remember your right to an attorney as well, especially if you believe a tax fraud charge has been levied against you in error.

Sources:  The Internal Revenue Service, "Chapter 1, Penalty Handbook, Section," Accessed Nov. 7, 2014

The Internal Revenue Service, "Chapter 1, Fraud Handbook, Section," Accessed Nov. 7, 2014