Taxes are anything but simple. We have a complex tax code with plenty of opportunities for honest mistakes. In most cases, if you’re found to be in error during an IRS audit you’ll be required to pay the taxes owed, interest, and a 25% penalty. However, if the IRS suspects a “mistake” may have been a willful one, things can become more serious quickly. The IRS considers willfulness as a voluntary, intentional violation of a known legal duty. An article onForbes’ website detailed some of the scenarios where the IRS may consider your actions something other than simple mistakes. 

The Tax Software Made Me Do It

This excuse was used successfully during Timothy Geithner’s confirmation process where it was revealed he failed to pay $35,000 of self-employment/FICA taxes. TurboTax didn’t inform him of his need to pay, so he didn’t. This embarrassing blunder didn’t prevent him from becoming the next Treasury Secretary, but tax courts haven’t always bought this defense from people in similar situations. If your numbers don’t add up, the tax software defense may not be enough to save you. 

Making Large Mistakes

The bigger the “mistake”, the higher the chances your conduct will be called into question. Not reporting all our your assets, miscategorizing a deduction, or underreporting income could all be considered willful under the right circumstances. The simple mistake defense looks less likely the bigger the omission is.

Engaging In Suspicious Behavior

The more actions you take that appear to be a concerted effort to conceal income or assets to avoid taxes the harder it becomes to justify that your mistakes weren’t willful. Things like keeping deposits below the $10,000 reporting threshold, using cash or travelers checks, creating trusts or corporations, under-reporting income or over-reporting expenses all carry big risks if you’re doing it for the wrong reasons. Even failing to learn about your duty to report your income properly can land you in trouble. The IRS may consider this “willful blindness.”

Business owners who make an honest mistake and are willing to correct it rarely have issues with the IRS that extend beyond paying back taxes, interest, and penalties. However, people who are extremely careless or are engaging in a concerted effort to reduce a tax burden through underhanded means have reason for concern.