Taxpayers are often unaware that the IRS distinguishes between innocent, or non-willful reporting, and mistakes and errors it considers being willful. Because financial penalties and even prison time are real possibilities, it is important that all taxpayers know the differences between these two types of IRS tax mistakes.
Willful Mistakes
Errors that are deemed to be voluntary, intentional acts of violating a known legal principle are considered to be willful. The IRS establishes willfulness by showing the taxpayer’s knowledge of reporting requirements and his or her conscious decision to not comply. The simplest examples are of individuals who deliberately report an income amount that is less than he or she actually received. Although these people may not intend to cheat the IRS or harm anyone, their acts of refusing to learn the reporting requirements and concealing the extra income can be used to establish the case for willfulness. The person’s conduct regarding the concealed facts is also important. For example, some courts will also look for behaviors like using cash and traveler’s checks, under-reporting business income, and inflating expenses. Repeated instances of failure to comply with reporting requirements can cumulatively suggest willfulness.
Penalties
Penalties for mistakes may vary; however, 25 percent is not uncommon. In cases of civil fraud, the percentage is 75 percent, though civil fraud is not often asserted. If even minor instances of fraud or small misstatements are found, the taxpayer may receive a jail sentence. In these cases, taxpayers may find that the burden is placed on them to prove their misstatements were innocent.
Real Cases
Courts have varied when it comes to identifying conduct they recognize as willful. The Turbo Tax defense emerged when someone successfully argued that he was not alerted by his TurboTax software that he owed $35,000 in self-employment /FICA taxes. However, courts denied the same defense in several subsequent cases that involved other taxpayers.
An action that may seem to be a simple reporting error can cause taxpayers to be subjected to very serious penalties. Therefore, working with a qualified CPA is the best way to ensure correct and timely reporting. Gary Kaplan is licensed in Florida, New York, Washington, D.C., Maryland, and Utah. He has many years of experience and is available to help individual taxpayers and businesses avoid making potentially costly IRS tax mistakes. To learn more, call 1 (866) 643-3560.
