Tax Fraud vs. Negligent Mistakes: How Does the IRS Decide?

In our post last week, we began a discussion about how the Internal Revenue Service decides which taxpayers should be audited. Although some government studies have determined that people in certain jobs or professions are more likely than others to commit tax fraud, one’s job alone is not in itself justification for an audit. In most cases, the IRS conducts an audit after spotting a number of “red flags” in someone’s tax return.

For the sake of argument, let’s assume that the IRS has decided to audit you and they found what appear to be suspicious discrepancies. How does the IRS decide whether these discrepancies were caused by carelessness and negligence or intentional tax fraud?

In any discussion about mistakes vs. crimes, motivation is obviously the salient factor. Certain actions are often assumed to be fraud because they are not easy mistakes to make and often require some extra work and planning to execute. These could include:

  • Filing under a Social Security Number that is not your own
  • Claiming exemptions for a child that you don’t have or that is not a dependent
  • Keeping two sets of financial documents (ledgers) that are significantly different from one another but address the same finances
  • Vastly underreporting your income or working to hide a source of income

There are other actions that more reasonably could be mistakes than intentional fraud, and these usually come down to an IRS auditor’s judgment call. They could include:

  • Writing off as business expenses items which are actually for personal use
  • Underreporting income in small amounts
  • Taking more deductions and exemptions than you are eligible for
  • Overstating your exemptions and deductions

If you get audited and the IRS determines that your discrepancies were honest mistakes, you might still face fines. But they are small in comparison to the serious criminal consequences you could face if the IRS believes that you have committed intentional fraud.

For these and other reasons, you should not go into an IRS audit unprepared and/or alone. It is important to have an experienced tax law attorney at your side in order to make sure your rights and interests are protected.


Brian Coggins

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