The Different between IRS Negligence and Fraud

There is a fine line between intentionally defrauding the IRS and making honest mistakes. While it isn’t comforting that your tax return may get audited and referred to the criminal investigation unit, it may make you feel a bit better to know that only 2,472 Americans were convicted of tax crimes last year. That is a very small number when you consider the amount of people who do the tedious task of filing every year on the dreaded date of April 15th. It is estimated that 17% of all taxpayers cheat their taxes in some way, or at least break some of the tax rules. Who is doing most of the cheating? Individual tax payers, mostly middle income earners. Corporations are only responsible for about 25% of all the tax crimes committed in the U.S.

Most of the cheating is done when people intentionally underreport their income. Most of this crime comes from those who are self employed, generally those who own restaurants, clothing stores, and car dealers. Other self employed common culprits include telemarketers, sales people, doctors, lawyers, hairdressers and even accountants. Underreporting income comes in first by far when it comes to how people cheat on their taxes. According to the IRS, only about 6.8% of deductions are overstated or phony. Once you are caught cheating, you may be assessed civil penalties and fines or worse, be referred to the criminal investigations department.

When you receive an IRS audit, one of the first things that the auditor does, and is trained to do, is look for tax fraud. To get this accusation pinned to your filings, you must have willfully and intentionally defrauded the IRS beyond the common and honest mistake. If you are keeping two sets of books, claiming a disabled dependent when you are single, or using a fake social security number, you are definitely in trouble and may want to call a lawyer right away. While the auditors do look for fraud while conducting your IRS audit, they rarely walk in suspecting it. Generally, the auditor understands that tax laws are complex, and mistakes do happen. An honest mistake usually gets you a 20% penalty to your tax bill, but all out fraud can result in a 75% civil penalty. Most tax crimes do not end in jail time although that can happen. The line between committing tax fraud and making an honest mistake is blurry, even for the auditor unless you were gutsy enough to alter checks, keep two sets of books or use falsified information.