How do tax authorities distinguish tax fraud from tax negligence? P.2

Last time, we looked at the types of things tax authorities look for when investigating tax returns for fraud and negligence. The issue is an important one for a couple reasons. First of all, the determination as to whether a taxpayer acted fraudulently or negligently in submitting tax returns impacts the penalties that will be imposed.

If a case is suspected to involve fraud, it will be referred for criminal investigation and the penalties will become correspondingly harsher. It is important to keep in mind, though, that the IRS is bound by internal policy to apply penalties in a manner that is fair and consistent, and not as a bargaining chip or a punishment for lack of cooperation. Those under investigation have the opportunity need to make sure, therefore, that they work with an experienced advocate who can protect their interests.

Secondly, it is important for those being audited for potential tax fraud to do everything possible to prevent tax authorities from mistaking negligence with fraud. Because there is no litmus test for determining whether a defendant submitted a fraudulent return, it is possible for authorities to make mistakes in assuming fraudulent intent.

One way an experienced legal advocate can help is in effectively presenting explanations for filing incorrect tax information. Offering a reasonable basis for investigation results can help potentially reduce the penalties that are imposed. These explanations can help tax authorities distinguish between civil and criminal fraud and thus reduce penalties. An attorney can also help to make sure the IRS, in its use of specific penalty computations, makes these calculations correctly so that the taxpayer is not unduly punished.

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