Trouble with taxes can cause a great deal of stress and disruption, especially for those who do not have a strong understand of tax law or the way the Internal Revenue Service conducts its investigations. This is especially true of those who become the subject of a criminal tax investigation.
When investigating discrepancies in a tax return, one of the things the IRS is on the lookout for are the distinguishing features of either negligence or fraud. The distinction between the two is that negligence involves a failure to reasonably attempt to comply with tax law, while fraud involves intentional noncompliance.
The distinction between the two is tied up in the mental state of the taxpayer, and the IRS typically looks to circumstantial evidence to determine the taxpayer’s state of mind. According to the IRS, some of the common indicators of tax fraud are: tax errors all benefit the taxpayer; sources of income are concealed; significant omissions of income; false deductions, credits or exemptions; and significant or frequent cash transactions for businesses.
Negligence is typically identified by such things as: a history of noncompliance; poor record-keeping; failure to establish effective processes for reporting business transactions; failure to provide a reasonable explanation for discrepancies in reported income or other matters the IRS is investigating.
In terms of penalties, the difference between fraud and negligence can be significant, and IRS agents can and do sometimes make mistakes. For these and other reasons, it is important for those under IRS investigation to always work with an attorney to ensure that they have guidance and advocacy throughout the investigation process.