- “But I’m not a criminal?”
- “I didn’t mean to deceive the IRS.”
- “I just didn’t understand the relevant tax laws.”
These statements and many others like them are uttered to the IRS every year. And in many cases, these statements are true. It is extremely common for regular, honest people – not hardened criminals and not even people intending to game the system in any way – to be accused of tax fraud and tax evasion.
But do these excuses matter at all? Does ignorance of the law or honest administrative or accounting error excuse what could otherwise be tax fraud or tax evasion?
Tax fraud and tax evasion
First, it is important to understand the differences between tax fraud and tax evasion.
Although they are very similar, there are some slight nuances between the two. Tax fraud involves falsifying information on one’s return, like income, expenses or state of residence.
Tax evasion on the other hand, tax evasion can include any form of deceit or concealment to avoid paying the full tax amount owed.
Both tax evasion and tax fraud can bring a fine of up to $250,000 and prison time.
Accidental tax crimes
One of the most important modern cases covering the argument of ignorance in tax fraud/evasion charges is Cheek v. United States 498 U.S. 192 (1991). In short, the Court ruled that a taxpayer who erred but had a good faith belief that he or she was not violating the law, did not act willfully to deceive the IRS. Without willfulness, an essential element of fraud or evasion was absent.
A necessary element for a conviction of tax fraud is willfulness. When a person makes an honest mistake, it means that the deception was not done willfully, and, thus, there is no fraud crime.
So, the general rule is that an honest mistake in filing tax errors is not a crime of tax fraud or tax evasion. But this is not the end of the story. As with most aspects of the law, there are numerous distinctions and nuances to keep in mind. The IRS will not accept an argument of ignorance lightly.
When a mistake emerges in your tax record, the IRS will try to find anything to established that you should have known better. It is, ultimately, your responsibility to make sure your taxes are filed correctly, so it is probably not going to pass muster if you make sloppy mistakes and just assume you can plead ignorance if you are audited.
The most important thing you can do is work with an experienced, knowledgeable tax lawyer who can help you file correctly and provide counsel and defense if you are ever audited.