IRS Audit Penalties for Tax Fraud vs Honest Mistake

The IRS tax code is something people are very well aware of, but very few can grasp completely. That’s why many individuals don’t know whether they’ve committed frauds without even knowing or not.

Fraud and tax evasion are notions everybody has to be familiar with, since tax fraud and tax evasion penalties are manifold, coming in many shapes and sizes. With all these, you mustn’t despair, since the IRS will be able to tell the difference between genuine fraud and honest mistake.

Tax Fraud is a serious offense. Thus, you should not face an IRS Audit alone. Enlist the help of a tax specialist like Community Tax, who can represent you in an IRS Audit.

Let’s see what aspects pertain to each of the two categories:


Fraud is the direct result of fraudulent, mischievous activity. It involves falsified documents, hiding one’s income (partially or totally), overstating deductions, understating income, income transfer and legitimizing the concealment of personal expenses in business ones, among others.

When a taxpayer or business owner is susceptible to fraud, the IRS will send an auditor to look for these signs. The most common form of IRS fraud is income tax fraud. Anybody from doctors and restaurant owners to salespeople, store owners and workers underreport their incomes. This is immediately seen as money laundering, an economic term you are surely acquainted with.

The outcome varies according to the seriousness of the problem and whether the fraud was deliberate or not. Tax fraud, the deliberate one, in particular, is obvious to a professional auditor. Nonetheless, the percentage of massive criminal frauds is smaller in the U.S. than it used to be.


 Naturally, when all the signs of willful tax evasion are absent, the auditor will know that negligence is the cause of the deviations. Mistakes are, by nature, unintentional, but that doesn’t make a taxpayer exempt of penalties. Of course, they’re not as serious as the ones given in the case of obvious fraud (jail time inclusively); they’re mainly fines.

Penalties for tax evasion can easily climax with imprisonment if the culprit did it knowingly. In both cases, the IRS will send the auditor to research on the issue in order to make sure that everything is all right.

The next part of this article covers the IRS Audit. If you’re about to face an IRS Audit, it is prudent to get professional help. One provider I recommend highly is Community Tax.

The Audit         

First of all, when you’re notified on the unfolding of an audit, it does not necessarily mean you’ve done something wrong. Audits can happen at random, so don’t lose your head. When an audit is to befall them, many persons turn pale and then start to behave chaotically. You don’t have any reason to stress yourself if you have nothing to hide.

The IRS typically notifies audits by e-mail, and they will communicate what documents you will have to provide upon the inspection. The IRS tax fraud auditor will carefully examine everything in order to see if all the things are as they should be or there are some inconsistencies.

Once again, they will be able to tell if those disparities were caused by deliberate evasion or authentic carelessness. The common mistakes are understanding your income and taxes and not paying your tax until the deadline. In this case, the penalties are monetary, i.e. fines that are collected in the same manner as taxes (the fine is usually 20% of your taxes).

If there has been criminal money laundering and any other type of criminal tax fraud, the most serious penalty is jail time.

If you don’t feel prepared for the audit, you can request an extension of the date. The IRS grants a maximum of 30 days. Keep in mind that if you fail at complying after this 30-day term, you will receive what is called “Notice of Deficiency,” and no additional time will be added after that. Subsequently, the audit will take place whether you’re ready or not.

Methods of Avoiding Penalties  

The ultimate way of doing that is, of course, being transparent on any monetary aspect of your business. As you’ve seen in the previous paragraphs, it doesn’t do you any good to try to cheat the IRS. It’s to your benefit to keep your paperwork in an orderly fashion and eventually to hire a professional accountant that will take care of everything related to the IRS and finances in your company. Such an accountant is not an option, but a necessity, especially when you own a big company/corporation, were hundreds of papers come and go on a daily basis. Negligence stops being negligence when you’re well aware of it, but you keep on going down the same road.

The bottom line is that you can seldom commit a serious criminal fraud without knowing it. That type of fraud is mainly met in organized crime groups, money launderers, drug dealers and so on and so forth. That is to say: you can do criminal fraud only if you want to. If you’re a small business owner, you’re in the clear unless your objective is to scam the IRS until they find out what you’ve been doing.

In any case, look to a tax professional like Community Tax who can help you with dealing with an IRS penalty.

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