Consequences of padding tax deductions is serious and you are gambling with the IRS. Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” With that in mind, it is best to be prepared, at least financially, for taxes and tax season each year.
When it comes to deductions, things can get sticky. What is the harm in taking a little extra here or there? Taxpayers “shouldn’t gamble with their taxes by padding their deductions,” says IRS Commissioner John Koskinen. Overstating charitable contributions, padding business expenses, and falsely claiming earned income or child tax credits are common ways unscrupulous taxpayers try to cheat the IRS. However, the IRS is wise to these gambits and catches cheaters with its efficient automated systems.
If you knowingly file incorrect tax returns, the government may apply the following civil penalties:
- 20% of the disallowed amount for filing an erroneous claim for a refund or credit.
- $5,000 for filing a “frivolous tax return,” one missing enough information to figure the correct amount or containing substantially incorrect information.
- In addition to the tax owed, a 75% penalty if the underpayment resulted from tax fraud.
Also, the IRS can take you to criminal court and seek additional fines and/or prison time if it suspects and proves you are guilty of the following:
- Tax evasion.
- Purposely failing to file a return or pay taxes due.
- False or fraudulent statements.
- Identity theft.
Although dedicated debtors’ prisons may no longer be in use in the United States, there are plenty of consequences that can affect your business and life.
Contact one of our knowledgeable CPAs to discuss your credits and deductions.