Each year the IRS publishes a list of its Dirty Dozen tax scams list. The list usually includes scams such as abusive trusts, improperly inflating refundable credits such as the earned income tax credit, and hiding income or assets offshore.
A new entrant for 2016 is falsely padding deductions on tax returns. Recently, the IRS warned taxpayers to avoid the temptation of falsely inflating deductions or expenses on their tax returns to under pay what they owe or to increase their refunds.
The audit rate for personal tax returns is under 1% so many people feel they can inflate their deductions and there is little chance the IRS will find out. However, if the IRS does audit a return with inflated deductions, the taxpayer is in for a nightmare experience.
Significant civil penalties may apply for taxpayers who file incorrect tax returns, including:
• 20% of the disallowed for filing an erroneous claim for 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% of the amount owed if the underpayment on the return resulted from tax fraud
Criminal penalties may also be imposed 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 tax return
• Committing identity theft
The actual punishment for criminal actions include substantial monetary penalties and jail time.
Most tax return preparers will prepare returns honestly. However a cottage industry for tax scam artists exists. These preparers manufacture tax returns that grossly overstate deductions and create tax returns that qualify for substantial refundable credits such as the earned income tax credit.
The IRS published guidance to taxpayers on properly selecting a tax return preparer.
To see how this applies to you, give us a call at 248-538-5331.