Understanding Good Faith, Negligence, And Fraud In Tax Law
Receiving a notice from any tax authority, such as the IRS, can put a lot of fear into you. Worse, the government rarely provides a clear explanation of whether it feels you made an error due to a good-faith mistake, negligence, or fraud. It's up to you to decide how you want to navigate these issues, potentially risking allegations of civil or even criminal misconduct.
Understandably, you're probably looking for tax attorneys who can tell you what's what. Here is a look at the three possible allegations you might face and how tax attorneys typically try to address them.
The argument you're making here is fairly straightforward. To the best of your knowledge, you were applying the tax laws appropriately. In other words, you believe you either paid what you owed or filed the proper paperwork for deferring payments or not paying.
Depending on the circumstances, you might also be presenting the tax court with one of three attitudes about paying whatever amount is listed in the notice. First, perhaps the reported error is correct, and you intend to pay the full amount listed. Second, you believe there was an error, but the amount is different. Finally, you might argue no error occurred and the government is simply wrong.
At this point in the discussion, the topic veers to what the government might be alleging. It can be hard to understand what the government is getting at when it sends you a notice. For that reason, it's wise to talk with a tax attorney before you even send a response back. Again, tax notices do a terrible job of explaining accusations, and tax agencies rarely are forthcoming with explanations.
To be clear, your goal in this scenario is to not make the situation worse. If it seems you're being accused of negligence in your filings, such as submitting the wrong paperwork or not sending any, you want to keep it at that level and not escalate the accusation to fraud. Respond to all inquiries promptly and try to track down where you might have messed up. Make arrangements to pay any penalties if they appear to be justified.
This means you intentionally misled the government about your finances to pay less in taxes. As previously noted, the government may not clearly state they think you committed fraud. A tax attorney will generally encourage a client to come clean and pay penalties, if necessary. If you stand accused of a crime, the government will eventually have to take the case to criminal court.