You have a gut feeling in your stomach. There's an issue with one of your tax returns. And you're just waiting for a letter from the Internal Revenue Service (IRS), where the IRS notifies you that it has caught the mistake. But what has got you really concerned is wondering if the IRS will consider the issue tax fraud or negligence. How will they decide?

(Before we go any further, we have to say—we know it's a common practice, but don't just wait for a letter from the IRS. Get an experienced attorney to review your return and figure out a strategy to help you address any potential liabilities.)

What's Negligence

Under the Internal Revenue Code, negligence is defined as “any failure to make a reasonable attempt to comply with the provisions of this title, and the term ‘disregard' includes any careless, reckless or intentional disregard.”

To that end, the IRS advises its auditors that the following are examples of negligence:

• Failure to keep adequate books and records
• Unreported or understated income without a reasonable explanation
• Overstated deductions and credits without facts or documentation
• Failure to make sure that the taxpayer had all of the necessary information and documentation to file a timely tax return

Tax Fraud

Tax fraud, as the IRS explains, “is always intentional.” Someone who is guilty of tax fraud purposefully misled the IRS to avoid taxes. 

So to find tax fraud, IRS auditors are looking for:

• Large discrepancies between actual and reported income
• Fictitious records
• Failure to keep or produce records
• False claims of deductions, credits, or exemptions
• Misrepresentations regarding income or related facts or circumstance

If the IRS finds you were negligent, then it can assess penalties of 20%. If the IRS decides you were committing intentional tax fraud, you can face a 75% penalty and possible criminal charges.

Whether you're concerned about an allegation of fraud or negligence, the answer is still the same: Get an attorney who specializes in tax law to review your potential liability and come up with a legal strategy for you. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.