Tax Fraud vs Negligence: What’s the Difference?

Tax Fraud vs Negligence: What’s the Difference?

What is Tax Fraud vs Negligence?

Tax Fraud vs. Negligence: A common question we receive is about the difference between tax fraud and negligence. While tax negligence can be as simple as making a simple mistake or error on a tax return — tax fraud is much more complicated. With tax negligence a person may be able to avoid all IRS penalties through reasonable cause.

On the other hand, if somebody asked fraudulently, reasonable cause is generally not available and instead a person has to submit to the voluntary disclosure program in order to get compliant.

Let’s explore the differences between Tax Fraud vs Negligence.

Tax Negligence Example

When a person is negligent, they are non-willful and unintentional in their non-compliance.

In other words, the person may have made a mistake and that mistake resulted in an error with a tax return filing, calculation, etc.

David is completing his tax return. He has various foreign accounts, including foreign pension plans.

David reported the foreign bank accounts, but did not report the foreign pension plans because he was unaware that foreign pension plans are considered accounts.

Therefore, David will have to go back and revise his Tax Return Form 8938 and FBAR. If David’s judgment of error had no intent or recklessness behind it, and he simply made a mistake about the reporting requirements, then this would generally qualify as negligence.

Tax Fraud Example

When a person is fraudulent, they acted with “willfulness” to avoid paying a tax, reporting an asset, etc.

For civil tax penalty purposes, willful does NOT mean intentional. It may also refer to less than intentional acts, such as willful blindness and reckless disregard.

For example, Peter has several foreign accounts and investments.

Peter is aware that all of his foreign accounts are reportable on the IRS International information returns. Despite the fact that Peter fully knows he is required to report this information, he intentionally does not include this information on his tax returns, because he believes he will never get caught.

This is an example of tax fraud, because Peter knowingly avoided IRS reporting.

Burden of Proof of Tax Fraud vs Negligence

The Burden of Proof for a typical civil negligence case is Preponderance of the Evidence. If Preponderance of the Evidence was to be quantified, it is considered “more than 50%.”  

On the other hand, with Tax Fraud the burden of proof is, “Clear and Convincing Evidence.” Clear and Convincing Evidence is the middle standard. It is more than Preponderance of the Evidence, and less than Beyond Reasonable Doubt. If it were to be quantified, it is thought of as “75%”

Tax Fraud vs Negligence Penalties

As provided by 26 U.S.C. 6663:

“(a)Imposition of penalty: If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

 (b) Determination of portion attributable to fraud If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

(c) Special rule for joint returns In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.”

Tax Fraud vs Negligence Penalties

Negligence Penalties are not as bad as Tax Fraud Penalties and will vary based on the type of case, and amount of tax liability.

Oftentimes, a person may avoid or minimize negligence and non-willful penalties with Reasonable Cause.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.