The Internal Revenue Service estimates that about 17% of taxpayers do not fully comply with the tax code. Yet the IRS only prosecutes a very small percentage of taxpayers, and less than 1% per year are convicted. Most people know that the IRS can be very aggressive about pursuing those it believes to be underpaying taxes, so how can this be? The answer is that the IRS recognizes a difference between income tax fraud and income tax negligence.
The federal income tax code is a very long and complex document, and the IRS understands this. Sometimes taxpayers will make errors in computing their tax obligations. The policy of the IRS is to assume that these taxpayers made an honest mistake instead of a willful evasion of the tax code. Absent any indication of fraud, the IRS will treat the error as a mistake attributable to negligence. Still, these mistakes can be expensive. The IRS may charge a penalty of 20% of the underpayment to discourage tax negligence.
How do IRS agents distinguish between negligence and fraud? Auditors look for common types of suspect and fraudulent activity. These activities include falsification of documents, concealment and transfer of income, overstatement of deductions and exemptions, keeping two sets of financial ledgers, willfully underreporting income, and falsifying personal expenses as business expenses.
IRS auditors are not infallible; sometimes they find fraud where none exists. Beverly Hills taxpayers may find themselves accused of tax fraud in cases where there is no fraud, and indeed no tax deficiency of any kind. Taxpayers in this position should consider getting the services of an experienced federal criminal attorney.