What Is the Difference Between Tax Fraud and Negligence?

Every year, millions of Americans feel a twinge of worry and doubt when they finalize their tax returns with their signature and e-file or mail them to the IRS and their state government.

Their anxiety is justified, as seemingly minor mistakes can land taxpayers in serious hot water, even after filing an amended return. These errors, omissions, and typos could potentially lead to an audit, severe fines, or even jail time, so it’s important that you fill out your taxes accurately and file them on time.

Thankfully, although nearly 20% of American taxpayers violate at least one tax law each year when completing their taxes, only .0022% ever receive any jail time. That’s because there are distinct differences between simple negligence, willful evasion, and deliberate fraud. In this article, we’ll explain the differences between those three types of tax violation as well as the consequences that follow from each.

Tax Negligence

Since the tax code is so complicated (and will become even more complicated now that the new tax bill has been signed into law), the IRS is willing to give taxpayers the benefit of the doubt by classifying basic human error as “negligence.”

Failing to attempt to comply with basic tax laws, general carelessness, or not keeping accurate records are all examples of negligence. These minor mistakes almost never result in jail time. Instead, the IRS punishes them by assessing relatively minor fees — usually 20% of the tax you should have paid if the return had been filed accurately. The fine is modest, but it can cause enough pain that you should remember to review your returns before filing or (even better) have a tax attorney double-check them for you.

Tax Fraud

Tax fraud is an intentional attempt to avoid paying some or all of your taxes. Common examples of tax fraud involve failing to file, failing to pay, underreporting income, and falsely claiming credits or deductions.

These violations are not difficult for IRS agents to discover, and the penalties can be severe (up to and including jail time), so please contact our offices immediately if you feel you need to file an amended return to correct any inaccuracies on your tax return. If you are unable to pay your taxes in full at this time, the IRS has several programs in place to help you get back on track.

Not reporting and underreporting income is the most common form of tax fraud. Freelancers and employees who primarily work for cash are the most frequent offenders, but for the IRS to consider underreporting as fraud, the violation must meet the IRS’ definition of “willfulness,” which states that “a good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness.” In other words, to commit fraud, the taxpayer must intentionally underreport their income or otherwise try to evade paying taxes.

The penalties for tax fraud vary significantly depending on the severity of the crime. The absolute minimum is a fee of 75% of the unpaid tax bill, which the taxpayer must pay on top of the full original amount owed. Fees can be as much as $250,000, and violators can even receive lengthy prison sentences depending on the specifics of their crime.

Tax Evasion

The tax code makes a distinction between “avoiding and “evading” taxes. Avoiding taxes is legal; it simply means trying to do everything within your legal rights to ensure a lower tax bill. Generally, if you aren’t trying to hide what you’re doing and disclose all necessary positions, you may be in good shape.

Evasion, however, is the attempt to avoid paying taxes on income by deliberately concealing that income from the IRS. Evasion is punishable as a form of tax fraud.

There are plenty of honest and legal ways to avoid paying unnecessary taxes. Charitable donations, contributions to pre-tax retirement funds, and applicable deductions are all great ways to help avoid expensive tax bills rather than evading them.

S.H. Block Tax Services May Be Able to Help Lower Your Tax Bill

If you aren’t sure which credits or deductions you are eligible for, please contact our offices to learn more. We have decades of combined tax law experience and an A+ rating with the Better Business Bureau. We offer free consultations in-person or over the phone, so please call (410) 872-8376 today or complete this brief form to schedule an appointment with one of our tax attorneys today!

And no matter what, never commit fraud on your tax return. It’s just not worth it, and there’s always a better route than breaking the law. Give us a call if you’re having tax problems, and we’ll do whatever we can to find legal options that help you get back into compliance as soon as possible.

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.