Negligence, Intent Versus Tax Fraud

Michael Lodge

by Michael Lodge

Over the past few days or months we have heard a lot in the media regarding the word of intent.  With the Clinton, DOJ and the FBI the words of intent and negligence is being discussed greatly.  There is also the issue of negligence versus committing a crime, or in this discussion of tax fraud.

Definition – “A failure to behave with the level of care that someone of ordinary prudence would have exercised under the same circumstances.  The behavior usually consists of actions, but can also consist of omissions when there is some duty to act (e.g., a duty to help victims of one’s previous conduct)”. 

Now lets talk about your tax return and filing tax returns.  According to the IRS individuals do about 75% of the cheating on tax returns.  The IRS also estimates that 17% of all taxpayers are not complying with the tax laws in some form or another.  And the number of tax fraud convictions for tax crimes has decreased over the past decade.  So the question as a tax payer must always have on their mind is whether the information you are giving the IRS is to the best of your knowledge correct, can you defend it if asked by the IRS to do so.

Most people cheat by deliberately under-reporting income.  The first thing in an audit is that the IRS wants to see all of your bank statements to see whether they can find that you have under reported your income.  A government study found the bulk of the under-reporting of income was done by self-employed restauranteurs, clothing store owners, and – you’ll no doubt be shocked – care dealers.  Telemarketers and sales people come in next, followed by doctor, lawyers, accountants, and hairdressers.  Self-employed taxpayers who over-deduct business-related expenses – such as car expenses – came in a far distant second on the cheaters hit parade.  Surprisingly, the IRS has concluded that only 6.8% of deductions are overstated or just plain phony.

If you are caught cheating by an auditor, she/he can either slap you with a civil fine(s) and penaltie(s) or, worse, refer your case to the IRS’s criminal investigation division.  The criminal part of this is very harsh and will disrupt your life greatly with the Department of Justice and the Criminal Investigation division working together to show that your intent and knowingly committed tax fraud.  Once you are at this level of being charged with a criminal act of tax fraud you have just disrupted you live going forward.

FRAUD OR NEGLIGENCE – IRS Auditors know what to look for in tax fraud, they are highly trained to know what to look for.  A willful act done with the intent to defraud the IRS – that dark area beyond honest mistakes.  Using a false Social Security number, keeping multiple sets of financial records and books, or claiming a foreign individual as a dependent when you are single are all examples of tax fraud.

To be fair, even though an IRS auditor is trained to look for fraud they may not routinely suspect it.  They know the tax law is complex and expect to find a few errors in every tax return.  They will give you the benefit of the doubt most of the time and not go after you for tax fraud if you make an honest mistake.  However, if you and your tax preparer, behind closed doors, come up with a tax scheme to report items not supported by documents, you are showing an intent to commit tax fraud.  You can’t just say your tax accountant did bad, especially since you were involved in the scheme, you have been consistent over the years, and you have no documentation to support your scheme.  Remember, when you sign your tax return you are signing “under perjury” that the information you are submitting is correct.  Scary isn’t it.

People do make careless mistakes.  A careless mistake on your tax return might tack on a 20% penalty to your tax bill.  While not good, this sure beats the cost of tax fraud – a 75% civil penalty.  The line between negligence and fraud is not always clear, however, even to the IRS and the courts.  If you have been submitting consistent numbers over many years, and you know the numbers are not substantiated with documents that you can make a legitimate argument to the IRS, then your intent is clear and consistent to commit tax fraud.  Be careful at how you report your income and expenses – do you have a legitimate argument with full documentation to support your deduction or the position you are taking on your tax returns.  This is vital.

The chances are small that you may be charged and convicted of a tax crime is almost nothing, it does happen to some folks.  If you are the minority – hire the best tax and/or criminal lawyer you can find.

For tax needs call our office at 877.778.1770

research conducted through Nolo.