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Can the IRS tell the difference between fraud and negligence?

We're humans, we make mistakes. But while some mistakes can be harmless, others have costly consequences. Take for example a mistake on your taxes. Even if you think you've dotted all you I's and crossed all your T's, you may still come to find that you have made an error. You're not alone if you do though. The complexity of the tax code makes this inevitable, albeit a massive headache when it does occur.

As we have talked about before on this blog, mistakes such as failing to claim the right amount of income on your taxes can lead to penalties that must be paid to the Internal Revenue Service. These penalties are assessed after an audit has been conducted and the IRS determines that a mistake has been made. Although the IRS knows that everyone is capable of making mistakes, it also knows that sometimes these mistakes are intentional. So how can the IRS tell the difference between fraud and negligence?

Using several common red-flags as benchmarks, the IRS can determine whether an error was the result of negligence or fraud. Some red-flag indicators include:

  • Willfully failing to pay taxes owed
  • Intentionally failing to file a return
  • Preparing or filing a false claim
  • Intentionally failing to report all income

If an income tax return is absent of these indicators, then it is assumed that the error or errors were made as a result of negligence, meaning no criminal charges will be filed. Unfortunately, just because you aren't being accused of a crime doesn't mean a violation of the tax code did not occur. Unintentional mistakes do still result in penalties.

In some cases, litigation may be necessary to resolve a tax dispute. If this ends up being the case for you, you may want to seek the aid of a skilled lawyer. As we said above, the tax code can be incredibly complex; and without the right legal background, you could find yourself losing an uphill battle in court.

Source: FindLaw, "Income Tax: Fraud vs. Negligence," Accessed Nov. 21, 2014

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