When it comes to tax noncompliance, intent can make a significant difference in terms of the penalties a taxpayer faces. When the Internal Revenue Service investigates noncompliance, there are certain things auditors will investigate to get a better handle on the intent of the taxpayer. This is where the distinction between negligence and fraud is critical.
Tax fraud, of course, is always intentional, with the specific intent being to evade tax obligations. Tax negligence, on the other hand, involves a range of less reprehensible states of mind, including carelessness, recklessness and intentional disregard. Auditors are trained to look for specific indicators associated with either negligence or fraud.
When it comes to fraud, auditors look for signs like: significant differences between actual and reported/omitted income; hiding sources of income; multiple errors that benefit the taxpayer; and claiming of deductions, exemptions and credits to which the taxpayer is not entitled. Auditors are essentially going to be looking for signs that the errors were deliberate, at least according to their standards.
When it comes to tax negligence, on the other hand, auditors are looking for signs that the mistake was less than intentional, such as: evidence that the taxpayer keeps poor records; similar reports on previous returns; and overstating deductions or credits without providing a sufficient explanation.
The line between fraud and negligence can be fine, though, and the IRS is not immune from taking as fraud what was actually a mistake or a pattern of carelessness. When a taxpayer is wrongly accused of fraud, it is critical to work with an experienced attorney to build a solid defense case. For that matter, working with a seasoned tax attorney as soon as an audit is initiated can be a good idea as well.