Fraud? Negligence? Know the Difference!
Each year the IRS opens thousands of investigations looking for possible tax fraud. In 2017 alone, the Criminal Investigation (CI) arm of the IRS identified $2.5 billion in potential tax fraud with a 91.5 percent conviction rate. While the IRS takes tax fraud seriously, they also understand that mistakes happen. Here is what you need to know.
Tax Fraud or Negligence?
Fraud. The IRS defines tax fraud as intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known to be owing. To be considered fraud, taxes must be owed and there must be deceitful intent. If convicted of tax fraud, penalties can be hundreds of thousands of dollars and may include prison time.
Negligence. On the other hand, tax negligence is an unintentional mistake. Common mistakes are wrong names or Social Security numbers, math miscalculations and errors in figuring credits or deductions. Most of these mistakes happen when individuals calculate taxes on their own. While a mistake is not usually considered fraudulent, it can create additional penalties and interest if the mistake results in more taxes owed.
Areas to be extra cautious
The majority of returns with false information will be considered a mistake, not fraud, due to a lack of nefarious intent. Even still, it's good to know when to be extra cautious to avoid unneeded scrutiny of your tax return. Here are some common areas the IRS is on the lookout for fraud:
- Underreporting income. Income that doesn't get reported is usually from some form of non-wage income like a side job or contractor arrangement. Make sure you have documentation of all payments received by you. Be very suspicious if you are paid in cash. All income, regardless of the source, needs to be reported.
- Including personal expenses as business deductions. Intentionally padding business deductions with non-deductible personal expenses can be deemed tax fraud. If you have a business, ensure that you have a separate bank account for your business transactions to avoid extra questions. For all deductions, keep your receipts in an organized fashion to prove the expense if necessary.
- Concealing information during an audit. Going through an audit can be an unnerving event. Don't add to the pain by intentionally hiding information from an auditor and unknowingly creating a fraudulent situation. If you are selected for an audit, the first thing to do is get help!
The tax code is complex and the IRS understands this. Missing information from taxpayers is often considered an accident unless there is reason to believe it is intentional. If you have a situation you are concerned about, don't hesitate to call.