Tax authorities distinguish between willful and non-willful mistakes. However, ignorance of the tax laws is generally not a good excuse.
Tax penalties vary depending on the circumstances of the matter. Penalties of 25 percent are common. Civil fraud penalties, on the other hand, sometimes are as high as 75 percent. Also, criminal tax matters generally begin following a civil audit. It’s possible that intentional misstatements or fraud will lead to imprisonment.
Mistakes are forgivable in certain instances. For example, tax courts have allowed in evidence the TurboTax defense. This is blaming tax mistakes on the computer software for not calculating taxes accurately.
Willful mistakes involve a voluntary and intentional violation of required conduct. This includes not following reporting requirements that you are aware of. Willful or not, care is always required. If the mistake is serious enough, the IRS may consider it as willful. Willful blindness also garners IRS attention. The IRS looks closely at conduct such as setting up trusts or corporations, or when taxpayers file certain forms and not others.
Recently, the IRS argued in one unpaid tax matter that big spending showed willful conduct. While the court concluded that spending alone is not willful, the IRS will make such arguments.
Experienced tax attorneys provide advice on the kind of behaviors that will raise red flags with tax authorities. Especially considering the consequences of tax evasion claims, taxpayers need to take care in filling out tax forms and not leaving determinations up to chance. And if an audit arises, it’s important to consider having legal representation.
Source: Forbes, “Beware Tax Mistakes IRS Calls Willful,” Robert W. Wood, April 6, 2015