Tax Fraud, Tax Evasion and Negligence
Tax Fraud, Tax Evasion & Negligence: When it comes to tax violations and the IRS, there are many common phrases that are thrown around to identify what type of tax violation the Taxpayer may have committed. Of course, some tax violations are worse than others — and while most violations do not result in a criminal investigation – it does happen sometimes. Instead of boring you with a detailed technical analysis of the distinction between three (3) of the most common types for tax violations you will come across — we will provide a simple introduction to the three most common types of tax violations in layman’s terms — and explain how they may impact your ability to move forward and file taxes in the future — or resolve prior years. Let’s review some of the basics of the three most common types of violations in layman’s terms.
Tax fraud is probably the most thrown around tax violation term you will find. Tax fraud can be either civil or criminal. The idea behind a tax fraud violation is that the Person acted with either intent — or reckless disregard — when it came to tax accuracy. Sometimes, a tax fraud violation may overlap with something more dangerous, such as tax evasion — which is criminal. From a baseline perspective, tax fraud is the idea of intentionally misrepresenting or omitting something to the IRS or US Government — which results in false tax liability. It could be that the Taxpayer intentionally omitted income, overstated deductions — or that the taxpayer knowingly did not file a tax return. Civil Tax Fraud may result in significant fines and monetary penalties. If the US government wants to pursue a criminal tax fraud violation under code section 7206, then they have to show that the Person acted with criminal willfulness — and they have to prove the case beyond a reasonable doubt to a jury of the Taxpayer’s peers. Most of the time, a tax fraud violation results in civil penalties.
Tax evasion is a much more serious tax violation. When someone commits tax evasion, they have committed a felonious tax crime — there is no civil violation for evading tax under Internal Revenue Code section. One of the key aspects of a tax evasion charge, is that the taxpayer usually will have to have performed an affirmative act. In other words, simply not filing a tax return does not usually rise to the level of tax evasion — although depending on the specific facts and circumstances — and if possibly there is a pattern or practice of certain behaviors — the government may have more ammunition to pursue a criminal case. As with all criminal cases, the US Government must prove that the Taxpayer acted beyond a reasonable doubt.
By far, the most common types of tax violations are the result of negligence. When a person acted negligently, they did not act with any intent or reckless disregard; they simply made a mistake and/or out of inadvertence filed an incorrect tax return — or did not file a tax return(s) at all. For example, if a Taxpayer does not report foreign interest income because they were unaware that tax exempt income from abroad may still be taxable in the United States — or conversely, they did not report their foreign interest income on their US Tax Return because they already paid foreign taxes on that income in a foreign country — that is usually the result of mere negligence. In other words, there was no intent to defraud or evade tax; it was just a mistake.
If a taxpayer is able to show that the tax violation occurred as a result of Negligence and not “Willful Neglect” then oftentimes the Taxpayer can circumvent any IRS penalty — or if a penalty has already been issued, to have that penalty abated.
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