Audits are about more than numbers. When there are discrepancies, a taxpayer's conduct also factors into how the IRS proceeds.

A taxpayer's intent, or reasons, for underreporting income or otherwise having errors on a tax return matters. The IRS divides this into willful and non-willful conduct.

Audits occur when the IRS notices a discrepancy on a tax return. These can range from failing to file the proper forms to the IRS having information that differs from what appears on a tax return.

Simplifying this consideration, the question boils down to: Was a taxpayer's mistake innocent or deliberate?

Willful vs. Non-willful Conduct

Non-willful conduct is mistakes, often due to a lack of understanding of the tax code. A taxpayer isn't attempting to avoid paying taxes. Taxpayers may still have to pay penalties and interest on unpaid taxes, but non-willful conduct doesn't subject the taxpayer to criminal charges.

Willful conduct, on the other hand, is intentionally leaving information off a tax return, failing to disclose accounts or information, or otherwise acting in a way to reduce tax liability. Willful conduct isn't simply finding allowable ways within the tax code to reduce tax liability. In some cases, willful conduct can rise to the level of criminal activity.

If the IRS finds evidence that a taxpayer was willful, that taxpayer faces potentially serious penalties, up to and including jail time. That's why, during an audit, it's important to show why any mistakes or omissions weren't deliberate but innocent mistakes.

Willful Conduct and Audits

Taxpayers should be honest during an audit and transparent about how the mistake occurred. This doesn't mean a taxpayer has to provide every single detail to the IRS, merely enough to provide evidence of non-willful conduct.

The IRS will consider a variety of information when determining the motives behind a taxpayer's conduct. The taxpayer's level of knowledge and the circumstances around the exclusion of information are just some of the considerations.

For example, a bank sends the IRS information about a taxpayer's account that the taxpayer didn't include on their tax return. The account was from a previous employer. The taxpayer moved the previous year and had forgotten to change their address with that bank. They didn't receive the tax information from the bank.

In this situation, the taxpayer can likely show non-willful conduct because the mistake wasn't intentional. The bank will have evidence that the return was sent to the previous address.

If you have questions about audits, 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.