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What is the difference between tax fraud and tax negligence, and why does it matter? P.2

In our previous post, we began looking at the difference between tax fraud and tax negligence. As we noted, the difference is between being mistaken or careless, or perhaps reckless, and intentionally attempting to deceive the IRS in tax reporting.

The IRS’ Internal Revenue Manual lays out some of the things tax examiners and auditors consider for when distinguishing negligence and fraud in an investigation. While the signs may be very clear one way or the other in some cases, distinguishing whether discrepancies are due to negligence or fraud is not always an easy matter for IRS agents. 

Tax negligence, as defined by the IRS, can often be accompanied by a history of tax noncompliance; a failure to keep adequate or accurate books and records or to establish adequate controls for processing and reporting business transactions; failure to provide a reasonable explanation for unreported or underreported income, or to explain other discrepancies raised by the IRS; and actions taken by the taxpayer to ensure their tax return preparer didn’t have the information necessary to properly file the return.

Fraud, on the other hand, can be indicated by verbal misrepresentations of the facts and circumstances; failure to keep or furnish records to back up what is being asserted; multiple errors all in the taxpayer’s favor; hiding sources of income; large differences between actual and reported income deductions; and failure to provide complete information to a return preparer about an ostensibly fraudulent scheme.

Many of the indications of tax negligence can be mistaken for fraud under the right circumstances, and it is critical for a taxpayer to have legal representation when dealing with the IRS to ensure the process goes as smoothly as possible. This is especially true in cases where the discrepancies are large and give the appearance of criminal intent.

In our next post, we’ll say more about this topic. 

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