How do tax authorities distinguish tax fraud from tax negligence?

In our last post, we mentioned that tax authorities are expecting a particularly busy year in terms of tax fraud. As we noted, departments of revenue have specific factors that they look for in terms of potential indicators of tax fraud. This is true at both the state and the federal level.

At the federal level, the IRS tends to look for tax negligence as manifesting in a cluster of factors potentially including the inaccurate filing combined with: a history of noncompliance; similar mistakes made in previous tax filings; poor record-keeping; failure to establish effective processes for reporting business transactions; or poor organization of documents and understanding of how the computations work.

With fraud, the factors authorities look for relate to the intentionality of the filing errors. When fraud is suspected, agents will look for things like: large underreporting of income; false explanations of the reasons for the reporting errors; evidence of concealing income sources; all the errors favor the taxpayer; and large, frequent cash payments that are not common to the taxpayer’s business. In general, the presence of only one indication of fraud would not be enough to support a finding of fraud, so authorities try to find multiple factors.

Whether a taxpayer is deemed to have engaged in fraud or negligence is an important issue since it can impact the penalties that are imposed. In our next post, we’ll speak a bit about this issue, and wrap up with some thoughts on how an experienced defense attorney can help.

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