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Negligence and Tax Fraud: What’s the Difference?

It’s not uncommon for both business owners and individuals to feel anxiety when they file their taxes. The U.S. tax code is complicated, after all.  Not only that, but the changes signed into law late last year will impact your filing for 2018.  So when April 15th rolls around, all filings must follow the new laws for the first time.

Even if you’re relatively confident that you’ve done your taxes correctly, the prospect of facing the Internal Revenue Service (IRS) and state tax authorities is not pleasant. And it can be especially frightening if you’ve done your own taxes or worked with a new accountant, and are unsure of how the new tax laws apply to you.  If your tax filings are wrong, you could face a fine. Serious errors can lead to both fines and imprisonment. Careless mistakes, omitted information, or even a simple failure of understanding is enough to cause Federal or state tax authorities to initiate an audit.

But while business owners and individuals need to make every effort to complete and pay their taxes correctly, undue anxiety and fear is rarely warranted. The law does distinguish between types of error and wrong-doing, and not every error rises to the level of fraud. In short, simple error (negligence) in filing your taxes is quite distinct from fraud in the eyes of the law and the tax authorities.

Negligence

The IRS refers to mistakes and misunderstandings in completing and filing taxes  as “negligence.”

Examples of negligent tax filings include:

  • Misapplication of the law
  • Careless data entry
  • Failure to keep accurate and complete records

The bottom line is, although you must make restitution payments for the errors if they caused you to pay less tax than you owed, such errors are not automatically regarded as criminal or fraudulent. The outstanding amount due plus any additional fees incurred in the audit process will generally satisfy your total tax obligation without further penalty.

Tax Fraud

Tax fraud is charged when a business or individual intentionally fails to pay some or all of the tax due.

Examples of tax fraud include:

  • Underreporting of income received
  • Failure to file taxes
  • Failure to pay taxes
  • Knowingly claims deductions or credits to which filers are not entitled

The most common form of tax fraud is underreporting of income. People in cash-based businesses and those who work as freelancers are the most common offenders.

The IRS considers tax fraud a willful action rather than simple ignorance of the law.  Absent a “good faith misunderstanding”, the penalties for tax fraud can be very severe with certain violations punishable with jail time.

Hire a Tax Professional for Help with Your Taxes

If you need to amend your records or are concerned that your taxes were filed erroneously, a tax attorney can help you become compliant. If you are already facing a tax audit, then call Rosenberg Martin Greenberg for legal counsel to determine your best course of action. Visit us in our Baltimore, Maryland office or contact Brian Crepeau at 410.649.4981, email bcrepeau@rosenbergmartin.com today.

Additional Resources:

  1. “Chances of IRS tax audit are lowest in years.” CBS News. April 13, 2014. https://www.cbsnews.com/news/chances-of-irs-tax-audit-are-lowest-in-years/
  2. Nitti, Tony. “What Are Your Odds Of Being Audited By The IRS?” Forbes. March 25, 2018. https://www.forbes.com/sites/anthonynitti/2013/03/25/what-are-your-odds-of-being-audited-by-the-irs/#53f058ef5d97

Rosenberg Martin Greenberg

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Phone: 410-727-6600
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Rosenberg Martin Greenberg

705 Melvin Avenue Annapolis, MD 21401
Phone: 410-727-6600
Map & Directions