Negligence Versus Tax Fraud: How the IRS Tells the Difference

What is the Difference Between Negligence and Tax Fraud?Negligence v Tax Fraud

The American taxpayer’s fear of the IRS is very similar to our fear of the dentist: irrational and rooted in nothing more than making mountains out of molehills (most of the time). What do I mean by this? Well, think about it. Think back to the last time you had a dental check-up and the days and perhaps weeks leading up to it.

And for what? Most likely nothing at all. Same goes for the IRS.  While we all know (well, most of us know) it is a crime to cheat on our taxes… the actual number of Americans who are convicted of tax crimes is surprisingly small (less than one percent of taxpayers occurring in one year according to the IRS).

On the other hand, the IRS has also estimated that a whopping 17 percent of taxpayers fail to comply with tax code in some way.

The Service also reports that it is individual taxpayers, as opposed to corporations, that commit 75 percent of income tax fraud.  But…we do need to ask the question “are all violations of the tax code, in fact cases of fraud, or simply just negligence?”

What Is Income Tax Fraud

Income tax fraud is defined as the willful attempt to evade tax law or defraud the IRS.

Tax fraud occurs when a person or company does any of the following:

  • Deliberately fails to file an income tax return
  • Willfully fails to pay taxes due
  • Intentionally fails to report all received income
  • Makes fraudulent or false claims
  • Prepares and files a false return

Is it Negligence or Income Tax Fraud?

Contrary to what many believe, the IRS is not out to get you and they do, in fact, understand that the tax code is an extremely complex set of regulations and rules that can be very difficult for most people to decipher.  And it doesn’t help that these regulations and rules are constantly changing and evolving either.  So when careless errors happen, and if the IRS sees no signs of fraud, they will typically assume that it was sincerely an honest mistake as opposed to the willful evasion of the tax code.

And in light of these circumstances, the tax auditor will usually consider it a mistake attributable to sheer negligence.

However, that doesn’t mean you would get off scot-free. Even though the taxpayer’s mistake may have been unintentional, the IRS will still penalize him or her 20 percent of the underpayment.  Otherwise, how else would they learn not to make that same mistake again?

But How Do They Know if it is Negligence or Tax Fraud?

IRS agents are pretty adept at distinguishing when an error committed is the result of negligence vs. willful evasion of the tax law.

They typically look for common types or threads of suspicious and fraudulent activity called badges of fraud. They include but are not limited to the following:

    • Falsifying documents
    • Using a fake Social Security Number
    • Willfully underreporting income
    • An Overstatement of deductions and exemptions
    • Keeping two sets of “books” or financial ledgers
    • Claiming personal expenses as business ones
    • Concealing or transferring income
    • Claiming an exemption for a nonexistent dependent such as a child or perhaps a disabled spouse

Contact an Attorney

Whether you have willfully committed tax fraud – in fact especially if you have committed tax fraud – or are just a victim of sheer negligence, you are going to want someone who knows the law on your side. If you are contacted by the IRS about your taxes or just need someone to talk to give us a call.  We offer free legal advice so you have nothing to lose! 248.262.3400


Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.