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What's the difference between income tax negligence and fraud?

While it might seem strange to be talking about the much-dreaded chore of doing your taxes with Thanksgiving only days away, it actually won't be long until many people find themselves camped out in front of their computer or at their kitchen table trying to make sense of a myriad of arcane tax regulations.

Given the complex nature of the tax code, questions naturally arise as to what happens when a person makes a mistake that can likely be attributed to an oversight or simple misunderstanding. Will the Internal Revenue Service view this for what it is, negligence, or will it choose to view it as tax fraud?

In order to really answer this question, it's first important to understand the difference between negligence and fraud for the purposes of income taxes.


As we mentioned above, the tax code is exceedingly intricate and can cause headaches for even seasoned professionals. While this is likely disconcerting to many, the good news is that the IRS recognizes as much and, accordingly, auditors will typically treat most oversights in tax returns as careless errors or honest mistakes provided no signs of willful evasion are present.

As to what types of conduct could serve as potential red flags for auditors that a mistake was willful evasion, consider the following:

  • Overstating exemptions and/or deductions
  • Understating income
  • Transferring and/or concealing income
  • Falsifying documents
  • Maintaining two different financial ledgers
  • Misclassifying personal expenses
  • Claiming exemption for nonexistent dependents
  • Submitting false personal information (i.e., Social Security numbers)   

It's important to understand that even unintentional errors on an income tax return can cost the filer a penalty of as much as 20 percent of the underpayment.

We'll continue this discussion in future posts, examining how the IRS defines income tax fraud and the possible penalties for this conduct.

In the meantime, if you are the subject of an IRS investigation or have been charged with tax fraud, it's imperative to consider speaking with a skilled legal professional as soon as possible as there is too much a stake.

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Mr. McKellar was voted by his peers as a “Top Attorney” by Knoxville’s CityView Magazine in its 2010, 2011, 2012, 2013, 2014, 2015, 2016, and 2017 editions. In 2014, 2015, and 2016, Mr. McKellar was selected as a member of the “Top 100 Trial Lawyers” by the National Trial Lawyers.

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