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Avoid Claiming False Deductions on Your Tax Return

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Avoid Claiming False Deductions on Your Tax Return

 

It’s tax time again and you may be getting ready to file your return. You are dreading filing the return as you have a balance due, and may be thinking, hey, the IRS can’t possibly review every return. Couldn’t I just claim a few of these deductions or increase my amounts so I pay less or even receive a refund?  It may be tempting, but it’s a very bad idea.  The IRS has severe consequences for falsely padding deductions and considers this a tax scam.

 

Consequences for False Deductions

Even if you hired a preparer who suggests using deductions improperly, you as the taxpayer are still the one at risk.  So, it’s important to know the consequences of taking the wrong advice:

  • To begin, just for filing an incorrect return the IRS will add 20% of the disallowed amount claimed for a refund or credit. This is on top of what you are probably already going to owe.
  • If the IRS determines you have filed a frivolous return, they will assess a $5,000 penalty. To be clear, a frivolous return is a tax return that does not include enough information to ensure the correct tax, or the information showing is horribly inaccurate. Remember, the IRS can and will review any prior returns to see if any information is drastically different from previous years.
  • If the IRS deems your return is fraudulent, you can expect a penalty of 75% of the amount owed.

The IRS informs that taxpayers may be subject to criminal prosecution and brought to trial for certain actions, such as willful failure to file a return, supply information or pay the tax due, fraud or false statements and preparing and filing a false return.  In addition, charges may be filed for the following criminal actions:

 

Penalties for Claiming False Dependents

As mentioned, the IRS has severe consequences for claiming deductions which are not years to claim.  In this case, claiming a dependent on your tax return who is not yours to claim raises your level of fraud, which is a crime, if you are a willing participant; meaning you know what you did was wrong, but did it anyway.  If you were negligent, you will receive a penalty as you should know the rules, but it is not a crime.

As you will see, the reason the penalties are substantial is claiming a dependent not only reduces your tax liability, but you receive an exemption. In addition, you are also eligible for other deductions and tax credits which also reduce your tax liability for items such as childcare, education and medical bills.

If you are caught claiming a dependent that is not yours to claim, the IRS will make you pay the tax you avoided in the first place by claiming this erroneous dependent.  In addition, you will be assessed a 0.5% late penalty for every month this bill goes unpaid.

For example, you reduced your taxes by $6,000 for filing this dependent, you will owe that back to the IRS.  The late penalty each month would equal $30 per month, not to mention the additional interest that will be accruing.

 

Civil Penalties and Criminal Penalties

In addition to the late charges assessed above, the IRS will also assess civil penalties, meaning the IRS concludes you claimed this dependent because of negligence. Remember, negligence is a misunderstanding of the rules.  If that is the case, the IRS will assess this civil penalty which is 20% of the understated tax.

Using the example above, the $6,000 will have a civil penalty of $1,200.

If the IRS concludes you claimed this dependent fraudulently, meaning you had knowledge this was happening and filed anyway, the IRS will assess a civil penalty of 75% of the understated tax.

Again, using the example above, the $6,000 will have a civil penalty of $4,500 for fraud.

If the IRS wants to assess more than the 75% civil penalty for fraud, the must file criminal charges.  So, if the IRS successfully prosecutes you for tax evasion due to filing this dependent fraudulently, you could spend five years in prison and pay a $250,000 fine plus the IRS prosecution costs.  It could also go further as the IRS could charge you with perjury as you swear under “penalties of perjury” when you file your return that everything on that return is true.  So, this dependent could also cause another three years in prison and $250,000 fine plus the IRS prosecution costs.

So, this dependent you thought could save you a couple thousand dollars, turns out costing you as little as $5,000 to as much as eight years in prison and $500,000+ in fines.

 

How to Avoid Fines and Audits

As demonstrated above, filing a tax return with a false or overstated deduction is an unbelievably bad idea.  Your best defense against fines and audits is to file a truthful and honest return.  If you are working with a preparer who suggests something that could save you money and sounds too good to be true, it most likely is the case.

If you file a return and that return is audited, it’s important not to panic.  In some cases, an audited return is merely the IRS asking a question, needing a document or could result in a refund.  The best defense is to review the letter received from the IRS, determine what it is they are asking and ensure you do not miss the due date for filing a response.

As taxes can be stressful and sometimes confusing, it’s important to work with a tax preparer you trust.  The IRS website provides information on preparers and if their credentials are up to date.  Read reviews of the firm you are looking to work with and also ask your friends or family members.

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