Tax fraud. Those words conjure images of old-time gangsters, dishonest corporate executives, and thieving politicians. But is it possible for the average taxpayer to accidentally commit tax fraud? The short answer is maybe.

Today, we’ll look at fraud versus negligence and how to avoid both.

Fraud vs. Negligence

The IRS deems fraud as a willful attempt to avoid filing an accurate tax return. Negligence means you were sloppy with record keeping or filing. But the penalties for both are stiff. Generally, you can expect a 20% penalty for negligence and 75% for fraud.

And the burden of proof lies with the government.

This means you have untold hours of headaches as they search for evidence to press their case. And even if what occurred was a mistake, if you are found guilty, it’s fraud.

Obviously, it’s much better to avoid this scenario altogether. So, let’s look at some common tax filing mistakes to avoid legal fisticuffs with Uncle Sam.

Deduction mistakes

Freelancers and home-based business owners seem to be most susceptible to this mistake. Even if you keep diligent track of income and expenses, a miscalculation on business expenses can trip you up. That’s because that mistake can lead to claiming higher deductions than you might be eligible for, which leads to underreporting taxable income. A very negative snowball indeed.

If you work from home, there is an even greater chance of mistakes because people often take deductions on ineligible purchases. It’s especially dangerous for people who work from home.

So, it’s worth the effort to review the IRS rules and speak with a tax professional so you don’t misinterpret them.

Not reporting foreign income

Like it or not, we become increasingly immersed in a world economy each year. Freelancers and remote workers can easily find themselves receiving payment in foreign currency deposited directly into their account.

That’s no big deal unless you overlook reporting it. Remember, regardless of currency type, all income must be reported on your taxes. Ignoring it means underreporting income.

And that means trouble for you.

Capital Gains (and Losses)

The IRS rules on capital gains are one area that can lead to filing mistakes. Just remember, capital gains can come into play if you sell anything used for personal purposes or make a profit on any investment.

Even inherited items, like land, can be subject to capital gains taxes if sold. And the more substantial the gain, the more likely it is to get the attention of IRS auditors.

This goes for individuals and businesses alike. You can get more information in our capital gains tax series and in IRS Publication 544.

The Bottom Line

Most tax filers don’t intend to underreport income. And though the IRS does not expect you to be a tax expert, it expects you to be familiar with the rules as they apply to your situation. Barring that, it expects you to get the help and resources required to avoid being negligent in your returns.

So, if you have deductions, take payments in foreign currency, or sell an asset or investment, it’s best to do your homework or consult a qualified tax professional for help.