What’s the Difference Between Tax Fraud and Tax Negligence?

For many reasons — some of which are justified and necessary, and others that frankly do not make sense and obfuscate rather than clarify — the Internal Revenue Code (IRC) is an excessively complex set of volumes, which contain laws enforced by the IRS (published as Title 26 of the United States Code/USC).

Partly due to this inherent complexity — and also because the web is riddled with incomplete, misleading or outright wrong “advice” on tax controversies— there continues to be significant confusion around two fundamentally separate concepts: tax fraud and tax negligence.  

What is Tax Fraud?

According to the IRS, tax fraud is “an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing.” To make things even clearer, let’s drill down into each aspect of this definition.

• “An intentional wrongdoing…” The IRS does not believe that ignorance of the law is a defense. Taxpayer’s have a legal obligation to be informed. However, as will be described in the section on tax negligence, the IRS may, at its discretion (or the appeals division and/or U.S. Federal Court’s discretion if necessary), take into consideration that an act or attestation was done without illicit intent. While this will not erase any penalties and interest, it will avoid criminal prosecution.
• “…on the part of a taxpayer…” This means that blaming your accountant, bookkeeper, parent, spouse, “financial wizard next-door-neighbor” or anyone else for the information on your tax returns is not an option. The IRS doesn’t care if taxpayers went through their return line-by-line, or if they scanned and signed it. If their name is on it, then they’re accountable.
• “…with the specific purpose of evading a tax…” This means that the IRS doesn’t consider all errors or omissions on a tax return (or any other submitted tax-related document) as fraudulent. The intentional wrongdoing noted above must be associated with an attempt to evade tax. It’s not like a college exam where all wrong answers count towards the final grade.
• “…known or believed to be owing.” This is a very important part of the definition that can be easily overlooked. The IRS doesn’t care if a taxpayer intentionally attempted to evade taxes that, in fact, it turns out they did not owe. As long as they believed they owed taxes, and attempted to evade paying them, the IRS will classify that action as tax fraud.  

The penalties for tax fraud are severe and can include having to pay all of your tax owing plus interest, plus 75% of the evaded amount. And while jail time is not the norm, it does indeed happen. It is not a false threat.

What is Tax Negligence?

As noted above, the IRS takes the position that ignorance of tax laws and filing requirements is not a defense. However, in some cases, taxpayers submit incorrect information without a willful attempt to evade taxes. In these situations — which the IRS assesses on a case-by-case basis — a charge of tax negligence may be levied.

Keep in mind that tax negligence does not mean that the IRS “forgives” the mistake. It simply means that they cannot justify an investigation that may ultimately turn into criminal prosecution. Taxpayers who commit tax negligence will be responsible for paying their full tax liability, plus interest and penalties (which is usually an additional 20% of the tax owing).  

Learn More

If you have received a letter, phone call or visit from the IRS — or if you are concerned that information provided to the IRS was incorrect, or if you know that it was incorrect — then contact the Law Offices of Jeffrey B. Kahn, P.C. today. All communication is protected by attorney-client privilege, and we have three decades of experience making sure that taxpayers are treated fairly by the IRS.

Also, be sure to check out our FREE eBook to learn what you need to do if you owe taxes to the IRS.