Tax Tips

Income Tax : Fraud vs. Negligence

The importance of taxes is a no-brainer. Tax is the lifeblood of any government. Just as a person cannot function without blood, the government will be useless without taxes. Look around you, the roads, utilities, some buildings and many other structures—at least those initiated by the government—are financed by taxes. This is why people are required to pay taxes. If citizens enjoy the benefits from the government, then they should pay for some of it.

However, it cannot be denied that there will always be some people who will fail to pay their taxes, or at least, they will fail to pay the appropriate amount of taxes. A person’s failure to settle his taxes could either be because of fraud or of negligence. Both are bad from the standpoint of the government—but one is criminal while the other is a plain oversight.

So what is a tax fraud? This is the conscious effort to defraud the Internal Revenue Service (IRS) or evade the tax law. Here are some indicators of a tax fraud done by a person or company:

  • Failure to file an income tax return
  • Failure to pay the tax due
  • Intentionally not reporting all income received
  • Making false claims
  • Preparing and filing a false return

Is negligence a tax fraud? There’s a saying that goes: “Ignorance of the law excuses no one.” But when it comes to tax fraud, ignorance can sometimes be chalked up to negligence and not necessarily a crime. The IRS understands that the tax code is very complicated and that regular individuals are prone to make a mistake when filing a tax return. For simple errors, the IRS will not make a big deal about it. It will be considered simple negligence as opposed to a fraudulent claim.

The IRS is composed of professionals and most of their employees have been doing the job for years, therefore, they can already spot tax fraud versus negligence on the tax return. Experience has taught auditors to spot the most common indicators of fraudulent activities:

  • There is an overstatement of exemptions and deductions in the tax return.
  • Some documents attached have been falsified.
  • There is concealment of some income.
  • There are two sets of financial ledgers maintained.
  • Falsely labeling personal expenses as business ones in order to get some deductions or exemptions.
  • Putting in false information on the tax return.
  • Claiming false exemptions i.e. a non-existent child.
  • Consciously underreporting income.

But what drives people to commit fraud? It’s so risky and the idea of jail time is not enticing at all. Why do some individuals take the risk anyway? Here are some common reasons why people evade taxes:

  1. If there’s a way not to pay taxes, people would prefer that way. Some people commit tax fraud because they think they can get away with it. That will then bring us to reason no. 2…
  2. Lack of enforcement.
  3. Principle. There are a handful of people who choose not to pay taxes in protest against the government. These people are suspicious of the government’s handling of the taxes so they would rather not participate in the questionable tax system.

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