Some people are meticulous in filling out their tax forms. They painstakingly file away each and every receipt, add up each expense and double-check their math before filling out their returns in an abundance of caution and honesty. Others are less concerned and play loose with the facts. They report expenses greater than what they actually incurred or claim deductions to which they are not entitled in an effort to increase the refund they receive or pay the government less than what they owe. If you are tempted to follow this course of action, the Internal Revenue Service has a word of warning for you: don’t.
According to the IRS, most American taxpayers fill out their tax returns honestly and send them in on time to make the deadline. But they also acknowledge that there are a few outliers who believe themselves safe in overstating the amount that they donate to charity or claiming to have spent more on business expenses than is true. Some go so far as to wrongly indicate that they are entitled to tax credits such as the Child Tax Credit or Earned Income Tax Credit when they aren’t. These types of actions and more can result in an IRS audit.
Where tax returns were once submitted and reviewed manually, automated systems now exist that are far more efficient. Not only have these made filing easier, they have also made the IRS’ review process far more efficient, and these systems generally are responsible for catching most of the irregularities that trigger an audit. Returns from the previous three years are subject to auditing, though if the agency suspects that a taxpayer’s return is fraudulent, they are able to extend their search and review returns from even earlier.
Penalties for Padding Returns
When a taxpayer files an incorrect tax return, the penalties can be substantial. Claims of credits to which a taxpayer is not entitled or refunds greater than are actually owed can result in a penalty amounting to 20 percent of the incorrect amount, and if a taxpayer files what the IRS deems a “frivolous tax return” that contains insufficient information or is clearly and substantially wrong, the fine is a whopping $5,000.
Filing a fraudulent tax return not only means that a taxpayer has to pay the amount that they would have originally owed, but can also be fined an additional amount based upon what they should have paid. The penalty can be as high as 75 percent again of the underpayment.
If you think that the worst that can happen to a taxpayer is having to pay financial penalties, keep in mind that tax evasion is a crime. Whether you make false or fraudulent statements on your tax return, purposefully don’t file a return, give the IRS the information they need or pay your taxes, or purposefully prepare a fraudulent return, you face the possibility of criminal prosecution. The same is true if you perpetrate identity theft. Having had somebody else prepare your return on your behalf is not a valid excuse: when you submit your tax return, you are legally responsible for its contents.
Facing a Tax Audit
Being told that you are being audited is a frightening experience, but it is important not to panic. Instead, immediately put yourself into the hands of a tax professional who is experienced in representing taxpayers who receive IRS notices. Our firm has extensive experience in all phases of tax audits, and can advise you regarding deadlines, the validity of the issues that are being raised, and the best way to proceed.