Understanding the Difference Between Tax Evasion or Fraud and Negligence

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There are many Americans who are unable to pay their taxes in time, for whatever reason. But, that doesn’t mean that they all go to jail or lose their assets. According to the Internal Revenue Service, only a few tax crime cases are actually prosecuted and result in convictions. That accounts for less than 1 percent of taxpayers each year. However, the agency also says that about 17 percent of taxpayers violate tax code in some way. That said, not all violations of the tax code actually amount to tax fraud.

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Tax Fraud versus Negligence

Fraud, when it comes to filing income taxes, is defined as the deliberate attempt to evade tax law or defraud the IRS. This occurs in situations where an individual or business entity intentionally fails to file an income tax return, deliberately fails to pay taxes owed to the IRS, fails to report all the income received, makes false claims and deductions and files a false income tax return.

But, not all circumstances point to tax fraud. The tax code is an extremely complex set of rules and regulations and can be challenging for many to completely understand. If you failed to pay taxes or make mistakes in your returns due to carelessness or simply because you did not know, that would not amount to tax fraud. In such cases, you might still end up paying penalties and fines. But you won’t be prosecuted for it.

Tax Fraud Red Flags

Here are some of the most common red flags the IRS looks for when it comes to willful evasion or fraud:

  • Fudging or falsifying tax documents.
  • Attempts to hide certain taxable income.
  • Overstating exemptions and deductions in an effort to lower taxes.
  • Portraying personal expenses and business expenses.
  • Claiming false dependents such as a child or parent.
  • Underreporting one’s income.

The Difference Between Avoidance and Evasion

While the two sound like they are the same, there is a difference. Tax avoidance is when a taxpayer attempts to lower a tax bill by legal means. This could be legally done by making legitimate deductions, taking allowed exemptions and by contributing to pre-tax retirement funds such as IRAs and 401 (k) accounts. Tax avoidance is a strategy, not a crime. Evasion, on the other hand, is taking some type of illegal approach to concealing taxable income in order to avoid paying income taxes. For example, if you are fraudulently claiming deductions, that would be considered tax evasion.

Do the Right Thing

The best way to go about your taxes is to pay what you owe and come up with legitimate strategies to lower your tax bill. Make sure you double-check your return before you file it so you’re not looking at penalties and fines. Whether it is negligence, evasion or fraud, unpaid taxes can turn into a major headache for taxpayers. If you are experiencing problems with your income tax, please contact an experienced Baltimore tax lawyer who can help you come up with the right solutions.


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