Tax Scam Alert: Fudging Your Deductions

3/17/2017 - By John Mascaro, CPA

You are supposed to pay no more than the taxes you owe.

But,… no less.

Some taxpayers still think they can fudge their numbers and play “audit roulette” with the IRS hoping that they won’t get caught underreporting income or inflating their deductions. Over the years, the IRS has implemented numerous systems and software programs to improve its ability to detect such things – often with dire consequences to taxpayers when they get that scary letter in the mail informing them that they are being audited.

This is why falsely claiming deductions, expenses or credits on tax returns remains on the annual “Dirty Dozen” list of tax scams.

Typical deductions that the IRS knows routinely get, how shall we say, “exaggerated” include:

charitable contributions,
padding business expenses,
tax credits that one is not entitled to receive.

Earned Income Tax Credit
Child Tax Credit

Under statute of limitations provisions, your tax return remains open when filed for three years; however, there is generally no statute of limitation for fraudulently filed tax returns. Those returns can remain open to IRS scrutiny and audit indefinitely.

Keep in mind that significant penalties may apply for taxpayers who file incorrect returns including:

20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
$5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.”

A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.

In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.

Moreover, taxpayers may be subject to criminal prosecution and be brought to trial for actions such as:

Tax evasion
Willful failure to file a return, supply information, or pay any tax due
Fraud and false statements
Preparing and filing a fraudulent return, or
Identity theft.

Criminal prosecution could lead to additional penalties and even prison time.

File an Accurate Return

The best way to protect yourself against an inaccurate tax return is to use great tax return software. For more complex returns, hiring a competent and qualified CPA is strongly recommended. A CPA with experience in tax preparation and research, like a good doctor, also knows how to measure “the pulse” of the complex tax rules and the administrative procedures IRS follows. A CPA with experience in tax is your best defense to guide you and to properly treat and report your particular tax situation each year in a way that allows you to sleep at night.

More information about IRS audits, when the IRS audits a tax return, Taxpayer Bill of Rights, and the balance due collection process and possible civil and criminal penalties for noncompliance is available at the IRS website www.irs.gov. Portions of this article were adapted from the recent IRS release.

If you have questions about how your taxes should be reported or the new tax rules in place, email me or contact a member of our Tax Consulting team.