Mistakes can be costly, especially when it comes to federal taxes. However, tax fraud is much more costly, which is why there’s significant value in understanding the distinction between unintentional tax mistakes and actual tax fraud.
What happens if someone accidentally makes a mistake on their personal or business taxes, and what is tax fraud? How do you know the difference and what steps should you take to correct the issue? Tax law provides different consequences and remedies depending on your intent. Here’s what you should know.
Understanding Tax Mistakes vs. Tax Fraud
A tax mistake is exactly that. It happens when someone makes an unintentional error on a tax return. This can happen due to miscalculations, incorrect information, or missing deductions. For example, if you accidentally provide an incorrect figure to your accountant, you weren’t trying to defraud the government. You just didn’t notice the mistake. Same goes if you handle your taxes yourself.
Tax fraud, on the other hand, is purposeful and deliberate. It’s the intentional misrepresentation of information to reduce your tax liability. People who commit tax fraud often do so by claiming false deductions or underreporting their income. This results in a return that shows a tax amount lower than what’s actually owed.
Key Warning Signs of Tax Fraud
So, what is tax fraud and what does it look like? If you’re considering whether something is a mistake or an attempt to defraud the IRS, there are a few warning signs to consider. The most commonly seen tax fraud behaviors, for both individuals and businesses, include:
- Hiding income
- Failing to report all your income
- Falsifying documents
- Overstating credits or deductions
- Making up deductions that don’t exist
- Underreporting earnings
- Not filing a tax return at all
Any one of these behaviors, when done intentionally, can equal tax fraud. Some tax filers will choose only one of these methods of reducing their taxes owed, while others will use multiple methods to bring their tax liability down to a lower amount. Those who don’t file a return at all may assume that the IRS won’t notice the lack of a return, or may not realize the return wasn’t filed if they have an accountant handling that for them.
Intent vs. Negligence: Determining the Difference
Intent is a very important part of tax law. If you can show that you make a mistake and didn’t intend to lie or defraud, you’ll generally face fewer penalties, or these penalties may be waived entirely. However, if your intent was to defraud the government and pay less than your share of tax, you may be subject to significant penalties.
The IRS assesses intent using the “badges of fraud,” which include considerations such as cash transactions, repeated mistakes, and refusing to cooperate if there are questions about your return. For example, suppose your accountant made what appears to be an honest mistake on your return, but the next year and the year after that they make the same mistake. In that case, the IRS may determine that it’s not actually a mistake, but rather an intentional choice and an attempt to defraud.
The IRS will also look at what you did once you learned that there was an error as further evidence of intent. If they find that you were told of an error and made no attempt to correct it, this may increase your chances of being charged with tax fraud.
Legal and Financial Consequences of Tax Fraud
For those found guilty of tax fraud there can be significant legal and financial consequences, some of which are:
- Civil penalties such as fines and additional interest (the civil fraud penalty equals 75% of the tax owed)
- Criminal penalties, such as prison time and a criminal record
- Long-term impacts including damage to personal or professional reputation, as well as financial instability
The extent of these penalties and impacts will depend on the level of fraud committed, whether it was ongoing, and other factors regarding a taxpayer’s business and personal financial dealings.
What Happens if You Accidentally Make a Mistake on Taxes
If you made a mistake on your tax return, taking proactive steps to correct it is the best way to mitigate any damage it might cause. For example, you or your accountant can file an amended tax return that’s correct and you can pay any additional tax due.
You generally have three years to file an amended return, but if you’re alerted to a significant mistake on a return older than that, you will still need to correct it. Voluntarily disclosing a problem and cooperating with the IRS will reduce your likelihood of a fraud investigation.
Conclusion: The Importance of Diligence and Seeking Professional Help
Honest tax return mistakes are often fixable, but any intent to deceive the IRS carries serious risks. If you’ve been accused or found guilty of tax fraud, you need a professional to help you navigate your legal and financial options.
That’s where we come in! Contact Kundra & Associates today to get the information and guidance you’re looking for to move past tax fraud issues. We serve clients internationally, as well as across Maryland, Virginia, and Washington, D.C. to provide you with the quality legal support you need and deserve.
