Overall, the IRS estimates that tax crime convictions only represent less than one percent of taxpayers each year. However, they also estimate that almost 20% of taxpayers are not in compliance with the tax code in some form. In fact, it is also more common for individual taxpayers to be in noncompliance as compared to corporations.
However, not all instances of this noncompliance represent straight tax fraud. In many instances, the culprit is negligence. According to FindLaw, tax fraud involves a willful attempt to defraud the IRS or evade tax laws.
What are examples of tax negligence?
The IRS does understand that the US tax code is complex, and it is very easy for individuals to make errors. If signs of wilful fraud are not present, then the IRS usually attributes any noncompliance to negligence.
Some examples of tax negligence include underreporting income, falsifying personal expenses as business expenses and overstatement of deductions and exemptions. These are very common examples of negligence, and most do not result in tax fraud prosecution.
What happens in the event of tax negligence?
If the IRS detects signs of negligence, the first step is usually an audit. If the accounting is off, in most cases the auditor will deem it negligence, rather than fraud. However, even if the negligence was an honest mistake, it is possible that the IRS will still issue a penalty of roughly 20% of the underpayment.
Most negligence comes from self-employed taxpayers who run cash-based businesses, as well as workers paid mostly in cash. Particularly if you are in a business like this, make sure to keep careful track of your income to avoid flags for negligence.