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What is the difference between tax negligence and fraud?

Readers may have questions about when a tax mistake rises to the level of tax evasion or fraud. 

As a preliminary matter, it should be noted that even the Internal Revenue Service acknowledges the complexity of the tax code. By the agency’s own estimate, about 17 percent of taxpayers fail to comply with applicable tax laws each year, yet only well under 1 percent of those will result in tax crime convictions. Interestingly enough, it is not corporations but individual taxpayers that account for about 75 percent of income tax fraud violations.

The crime of income tax fraud requires a showing of intent. That deliberateness of action can take many forms, such as refusing to file an income tax return or pay certain taxes, hiding certain income streams, or falsifying information on a return. Signs of fraud may include a taxpayer who has two sets of financial ledgers, claims a deduction for a non-existent child, uses a false Social Security number, or other errors that would be hard to explain away as mere mistakes. 

The life cycle of a criminal tax case usually begins by a referral from a civil unit in the IRS to one of their criminal investigation divisions. As an attorney that has helped clients facing IRS fraud, I understand the importance of challenging any signs of fraud highlighted by the IRS. There may be some discretion in determining when signs of fraud are present, and strong advocacy early in the investigation may even avoid exposure to criminal prosecution.

For anyone facing an IRS investigation or audit, it is important to understand that the accountant-client privilege may not extend to IRS criminal investigations. For that reason, a taxpayer should consult with an attorney as early as possible in any dealings with the IRS.

Source: FindLaw, “Tax Evasion and Fraud,” copyright 2015, Thomson Reuters

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