The Difference Between Fraud and Negligence in Income Tax Cases

Glen frost

Attorney at Law *

Certified Public Accountant **
Certified Financial Planner®
Master of Laws in Taxation
Every Tax Problem has a Solution

10480 Little Patuxent Pkwy, # 400
Columbia, MD 21044

Hablamos Español


The Internal Revenue Service estimates that only a minuscule percentage of tax crime convictions occur each year. However, the federal agency also estimates that roughly 17 percent of taxpayers violate tax laws in some way. Numbers also tell us at more than three-quarters of income tax fraud is committed by individuals and not corporations. The question here is whether all violations of tax codes amount to fraud.


Understanding Income Tax Fraud

Income tax fraud is defined as a deliberate attempt to dodge tax law or defraud the IRS. Tax fraud may occur when an individual or corporation deliberately doesn’t file an income tax return, willfully fails to pay taxes that are owed, fails to report income received accurately, makes false or fraudulent deductions and falsifies a tax return.


So when is it negligence and when is it income tax fraud? When taxpayers make careless mistakes while preparing the return and the IRS does not see any red flags that scream “fraud,” then that will be viewed as an error rather than a willful evasion of tax laws. In these cases, the tax auditor will consider it an error caused by negligence. Even though that negligence may have been inadvertent, the IRS may still impose a fine or penalty.


When looking to distinguish between fraud and negligence, IRS tax auditors will look out for common types of fraudulent activities. These may include:


  • Overstating one’s exemptions and deductions.
  • Falsifying tax documents.
  • Concealing or transferring income that was earned.
  • Falsifying personal expenses and business expenses.
  • Using a false Social Security number.
  • Claiming exemptions for dependents who don’t exist.
  • Underreporting income with the intent of evading taxes.


When it comes to tax fraud, those who are in the service industry and who tend to earn more in cash and/or cash tips have been identified as those committing most of the tax fraud. This is because it is easier to underreport or not at all report income received in cash. The IRS conducts criminal tax fraud investigations through the law enforcement branch of the agency.


What are the Penalties?

A taxpayer who is found to have willfully evaded paying income taxes may be subject to both civil and criminal penalties.


  • An attempt to evade payment of taxes is a felony and could result in five years in prison, a fine of up to $250,000 for individuals and $500,000 for corporations.
  • Making fraudulent statements is also a felony and could result in up to three years in prison and a fine of up to $250,000 for individuals and $500,000 for companies.
  • Failing to file a return or pay tax could result in up to a year in prison, a fine of up to $100,000 for individuals and $200,000 for corporations.


If you are facing issues due to alleged negligence or fraud, it would be in your best interest to speak with an experienced Maryland tax lawyer who can help discuss your unique situation and assist you with finding the right options.

Being Audited By The IRS?

Our tax attorneys explain audits and what you can do after receiving one.

Questions About IRS Tax Litigation?

Our tax litigation attorneys clearly explain the litigation process.

IRS Penalty Questions?

Find out what Maryland law has to say about IRS penalties.