How the IRS Determine if Conduct is Willful or Non-Willful

For tax laypeople the difference between willful conduct and non-willful conduct seems to be self-evident. That is, the things you meant or intended to do are willful and the things that you did not intend to do or have happen are non-willful acts. In reality, the definition of willfulness used by the IRS and Department of Justice does not necessarily comport with a layperson’s expectations. Furthermore, distinctions between willful and non-willful acts are rarely as clear-cut as taxpayers may think because even innocent behaviors can be misinterpreted as an attempt to conceal or otherwise evade taxes. As we have written about in past blogs, behaviors that appear to be intended to conceal or mislead can result in referral for criminal tax prosecution, or additional penalties.

How Does Willfulness Apply to My Tax Filings?

For tax and other purposes willfulness includes both voluntary and intentional violations of known legal duties. A voluntary act is an act where the taxpayer acts or fails to act on their own volition. For instance taxpayers that request their bank records to be sent to a non-U.S. address have acted voluntarily in their furtherance of tax fraud or tax evasion. However, unconscious or accidental acts would not be considered willful. Similarly, an individual who has acted deliberately would also be considered to have acted willfully. However willful acts go beyond intentional or voluntary acts. Other acts that may be considered willful include those who take deliberate action to avoid learning about a tax obligation, those who are “willfully blind.” Furthermore, individuals who recklessly disregard standards and requirements can also be held to have acted willfully.

Unfortunately for taxpayers who make accidental or inadvertent tax errors, these mistakes can sometimes be interpreted by federal agents as something more or part of a tax scheme. This is because federal agents are trained to look for and identify what is known as “badges of fraud.” Per the Internal Revenue Manual (IRM) used by the IRS addressing the identification of fraud, “badges of fraud” have been identified for purposes of income, expenses and deductions, books and records, allocations of income, taxpayer conduct, and methods of concealment. These indicators of fraud include:

  • Income – A wide range of activities regarding income may indicate fraud in the eyes of an IRS investigator. The failure to include all sources of income or the failure to explain substantial amounts of income indicates fraud. Likewise unjustified dealings in large sums of currency, the failure to keep a regular business account, and cashing checks at locations where the individual or business does not hold an account.
  • Expenses & deductions – Taxpayers who overstate deductions, mischaracterize person expenses as business expenses, or camouflage trust fund loans as an expense are likely to face additional scrutiny.
  • Books & records — Taxpayers who do not have any records or who keep multiple sets of records are likely face additional scrutiny. Likewise false entries in the books, conflicts between information reported on tax returns and in books, and checks to third-parties but endorsed by the taxpayer will all cause the federal agent to suspect fraud.
  • Allocations of Income – The IRS states that taxpayers who disburse funds to fictitious partners or who commingle filings with a related individual are more likely to be engaged in fraud.
  • Taxpayer conduct – Taxpayers who make false statements, are rude or abusive to the agent, attempt to obstruct the investigation, destroy books and records, fail to disclose all relevant facts regarding the return, submit false returns or affidavits, or engage in other acts are more likely to have committed tax fraud.
  • Methods of Concealment – Taxpayers who transfer assets for a token or otherwise insufficient amount may be considered more likely to have engaged in fraud. Additionally taxpayers who are insolvent, transfer all or most of their property to another person, engages in multiple secret transactions, or who conducts business under false names is more likely to have committed fraud.

While the presence of one or more badges of fraud is not determinative, a taxpayer’s inability to explain their presence is more likely to face criminal tax charges and other serious consequences. Unfortunately even taxpayers who can adequately explain all or some acts may not be believed by the interviewing agent due to the likelihood of such statements to be self-serving.

The Willful vs. Non-Willful Determination Affects Your Eligibility for OVDP

Aside from subjecting the taxpayer to more serious penalties, willful conduct can render a taxpayer ineligible for the reduced consequences the Offshore Voluntary Disclosure Program can achieve. Taxpayers who wish to benefits from OVDP must certify that his or her failure to comply with the tax laws was not due to willful conduct. Furthermore beyond this certification the taxpayer must also provide specific justification for each compliance failure. If the taxpayer relied on a tax professional to prepare the tax return, the identity and contact information of that advisor must also be included.

In short, willful noncompliance with the U.S. Tax Code can open the door to enormous penalties and criminal tax consequences while simultaneously potentially closing one path to reduced penalties. The Tax Law Offices of David W. Klasing can work with taxpayers to approach tax matters aggressively and strategically. Our results-oriented tax professionals can work to mitigate the tax consequences you face for alleged noncompliance. To schedule a private, reduced-rate tax consultation call us at 800-681-1295 or contact us online.