Income Tax: Fraud vs. Negligence

By | 2018-03-01T04:09:13+00:00 March 1st, 2018|

Taxes are integral to the development of a city, state, and even country. Without taxes, there will not be developments in infrastructure, transportation facilities, and programs intended for the people. Because of this, governments impose a certain percentage to collect from employee wages, consumer goods, shipping costs and company incomes.


Paying the right amount of taxes is one of the many duties of business owners as well as the working population. However, some commit tax code violations intentionally as well as unintentionally. The Internal Revenue Services or IRS indicated that around 17 percent of the total taxpayer population is non compliant to the tax code.


17 percent may seem like a small number; however, it could result in millions of unreported and uncollected taxes. Some taxpayers deliberately try to cheat the taxation system. However, there are taxpayers, who are unaware that they are committing some form of tax fraud.


Despite many cases of tax fraud, only a small percent get convicted for their wrongdoing. In fact, only 0.0022{c08633cdb8ed1e7bef2cd165fff76fa68117a0c5488bd74984b3bfcadafec826} of guilty taxpayers get convicted of tax fraud and other related cases. Whether it is intentional or not, the taxes that are meant to be declared and solicited remain uncollected. When it comes to taxes, there is a comparison between fraud versus negligence. They both result in the failure for the IRS to collect the right amount of taxes due.

Tax-Related Red Flags

With so many taxpayers, how can the IRS detect fraud? They normally distinguish tax fraud when they see some red flags. These red flags include:


  • Overstating the deductions and exemptions;
  • Falsified documents;
  • Creation and usage of a fake Social Security Number;
  • Underreporting of income;
  • Declaring personal expense under business expense;
  • Claiming of tax exemptions for non-existing dependents and
  • Transfer or concealment of other income.


The IRS becomes increasingly suspicious because of these red flags. Once they are able to detect these, the taxpayer will be under scrutiny for suspicion of tax fraud.


Fraud Versus Negligence

Tax fraud and tax negligence both have the same consequences; however, they are very different in nature. The taxpayer’s intent is what separates and differentiates tax fraud from tax negligence. It is all about whether you know and deliberately tried to under declare your income or not.

Tax Fraud

Based on the representation of IRS, tax fraud is the intentional misrepresentation of income in order to evade tax. Therefore, in order to commit tax fraud, the taxpayer must meet these two criteria:


  • Intent – Tax fraud requires the intent of the taxpayer. The taxpayer’s purpose is to avoid paying high taxes and wants to intentionally do something that enables him or her to pay lesser than the correct taxes.


  • Owing or tax due – Next is that the person must have tax due. Before one can commit a tax fraud, he or she must have taxes that are due for collection. Without this, there would be no tax fraud.


Tax fraud may be occur during these instances:


  • Preparation and filing of erroneous tax returns;
  • Intentionally falsifying all the forms of income generated;
  • Making false claims;
  • Intentionally fails to filling the income tax return documents and
  • Intentionally fails from paying the correct taxes owed.


As long as there is an intent to conceal, misfile or avoid declaring the right income; as well as there is the intention to avoid paying the right amount of taxes, the taxpayer is committing tax fraud. In addition, even if you did not perform the acts leading to tax fraud but gave your permission to the person doing it, you may also be part of the fraudulent act.

Why Tax Fraud is Common

With the help of auditors, the IRS is able to find taxpayers who commit tax fraud. The auditors are trained to detect common practices of wrongdoing. Cash-based businesses usually commit tax fraud because it is easy to hide or transfer cash.


Some of the usual offenders of underreporting their cash income, based on a tax fraud government study, are hairdressers, accountants, retail owners, restaurants, doctors, lawyers, sales people and car dealers. Service workers including handymen, mechanics, and restaurant servers are also often offenders of underreporting their cash income.


Surprisingly, tax fraud is easily done, as most taxpayers do their income tax returns on their own. Professionals, workers and employees including self-employed individuals do the filing themselves. With nobody to file their income returns for them, it is easy for these taxpayers to some form of fraud.


Tax negligence is in a way different from fraud. This occurs when taxpayers do not have an intention to commit fraud, but committed it anyway because of technicalities in their income filing. Despite having no intention to cheat tax income, a careless mistake can result to a 20 percent penalty on top of your tax dues. If proven to commit tax fraud, a 75 percent civil penalty will be imposed on the taxpayer.


Tax season is dreaded by many, but it doesn’t mean that you should be careless with filing your income tax return. It’s important to be careful and meticulous with reporting your income, to avoid acts of negligence. Just remember, being convicted of fraud is far worse than the tax you would have paid and it’s better to be safe than sorry.


Anne McGee


Anne McGee has over 20 years of experience writing about law subjects where she hopes her knowledge can help the common reader understand law topics that may be of relevance to their daily lives. If she’s not reading a good book, then chances are Anne is jogging during her free time.