Every year there are thousands of investigations launched by the IRS in their fraud prevention campaign. IRS criminal investigations during 2025 identified $10.59 billion in tax fraud and financial crimes. While these statistics might make business owners like you sweat a bit, the IRS knows that not everyone is out to commit fraud and that mistakes can happen under complex tax law.
What businesses need to know is the difference between tax fraud vs negligence.
What is Fraud?
Tax fraud is the intentional act of misconduct on the part of a taxpayer that is an intentional and deceitful avoidance of a tax they knowingly owe (also known as fraudulent misrepresentation). Fraud claims involving taxes are taken very seriously by the IRS. The penalties for those found guilty of tax fraud may consist of hundreds of thousands of dollars, substantial civil penalty assessments, and may also include prison time, if convicted.
The key to remember here is the intentional act of misconduct by the business owner. This could include financial and tax crimes such as:
- corporate fraud
- failing to file taxes
- money laundering
- employment tax fraud
- cybercrimes and scams
- identity theft
- filing false returns
- concealing sources of income
- false claims
- false deductions
- making a false statement to the IRS
- misreporting financials (misreporting income, refunds, etc.)
- account fraud
What is Negligence?
Negligence is an unintentional mistake made by a taxpayer. In some situations, this may also be referred to as negligent misrepresentation when incorrect information is provided without intent to deceive. The majority of these mistakes occur when business owners calculate their own taxes. Common errors are calculations involving math, credits, and deductions. Other errors include the wrong name or social security numbers. These types of errors are not generally considered fraudulent activity and are often the result of a careless mistake. Although, when these errors result in more taxes owed, it may result in additional interest and penalties or a civil penalty for the taxpayer.
The majority of returns with incorrect information are due to mistakes rather than fraud. However, there are common areas that you should be extra cautious of so that you can avoid any unnecessary scrutiny of your tax return. Below are some of the most common areas that the IRS will be on the lookout for fraud.
Non-reported or under reported income.
All of your business income needs to be reported, regardless of the source. Be sure to document all payments that you receive, including cash payments. We cannot express how important clean financial records are to ensure underreporting doesn’t take place. We recommend having these types of bank accounts to keep financials neat.
Adding personal expenses as business deductions.
If you own a business, you must keep a separate bank account for your business and personal transactions to avoid more questions from the IRS. Keep all receipts so you can prove any expenses if necessary. Padding business deductions with non-deductible personal expenses may be considered tax fraud under federal tax law.
Information concealed during an audit.
It’s stressful enough just going through a tax audit. Do not withhold information from an auditor intentionally. Hiding information from an auditor or making a false statement during an audit may create a fraudulent situation. The first thing you should do if you are selected for an audit is to seek help.
The IRS knows how complex the tax codes can be to taxpayers. Unless the IRS has reason to believe that an act on your part was intentional, it will be considered an accident rather than suspicious activity. If you need help with tax filings or corrections, contact us to schedule an appointment with one of our tax specialists.