Tax Day is coming up, and you’re probably compiling your W-2s, receipts and other important information. If you are among the estimated 1.6 million people who cheat on their taxes, now is the time to change your tune. Review some common “fibs” and the consequences that could follow. When it comes to Uncle Sam, honesty is the best policy.
Are you thinking of lying on your tax return? Indiscretions include:
Inflating deductions and credits. Let’s start with the basics:
- Tax deduction: An expense that reduces your taxable income, e.g., medical payments, mortgage interest, property taxes, state income taxes.
- Tax credit: An item that directly reduces your tax liability, e.g., children, retirement savings, education, earned income.
Deductions and credits offset your tax burden, and it’s natural to take advantage of as many (legal) opportunities as possible. When you’re struggling, it can be tempting to inflate these opportunities to secure a bigger refund. You might claim larger medical bills, an extra child in the home, increased retirement savings or even a fictional student loan.
False charity contributions. There are income limits when it comes to charitable deductions, but if you haven’t filled your quota, it’s tempting to “donate” $500 in clothes to Goodwill or an old car to The Salvation Army. The only problem? The IRS requires receipts from these organizations. If they have no record of your donation, trouble is on the horizon.
Status changes. Suppose you got married in January 2015, but you’re hoping to take advantage of marital tax benefits. Against your better judgment, you change your wedding date to December 27, 2014 on the tax form. The IRS won’t check, right?
Hiding money. The average full-time employee receives a paycheck with their taxes deducted, but part-timers and freelancers are usually required to make their own payments. Whether you’re hiding income from a side job or investment dividends, an unbalanced bank account will raise red flags on your tax return.
So, what happens when the IRS notices a seemingly harmless lie? Consequences include:
- An Audit. At the very least, you’ll face an audit from the IRS for the past three years. If they suspect significant fraud, e.g., omitting more than 25 percent of your income, they can audit up to six years of your returns to uncover additional lies.
- Interest, fees and penalties. If the IRS determines that you have underpaid, you’ll face back-taxes with fees and interest attached. You’ll also pay a fine—$5,000 or more—if they discover that you willfully deceived them.
- Criminal prosecution. Suppose the IRS finds that you owe them $22,000 in back-taxes from the past four years. Your budget can’t cope with the extra expense and you dodge the IRS’s correspondence. Eventually, they file a lawsuit against you. At best, the court will order you to pay your taxes. At worst, you’ll face incarceration.
- Credit damage. If jail time doesn’t scare you, what about long-term credit damage? If you owe more than $10,000 in unpaid taxes, the IRS automatically files a Notice of Federal Tax Lien, which will appear on your credit reports. This consequence can cause chronic damage to your credit score for up to seven years.
The bottom line: A lie may seem small, but the effects are anything but miniscule. Prioritize financial health and find yourself a good accountant. They can help you secure a fair and legal return.