“In this world, nothing can be said to be certain, except death and taxes” is a quote often attributed to Benjamin Franklin. With that in mind, it’s best to be prepared, at least financially, for taxes each year. Especially because the US government gets upset when you do things the wrong way.
The Risks of Taking Excess Deductions
When it comes to deductions, things can get a little sticky. You may think, what’s the harm in taking a little extra here or a little extra 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. But the organization is wise to these gambits and is catching cheaters with its efficient automated systems. We often see correspondence audits where the IRS asks for substantiation for items that appear to be overstated.
The Penalties
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” — that is, one missing enough information to figure the correct amount or one that contains substantially incorrect information
- In addition to the tax owed, a 75% penalty if the underpayment resulted from tax fraud
- These penalties are on top of potential failure to file and pay penalties that may also be assessed on the return
The IRS also 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 your life. That’s why it is wise to only deduct that which you can truthfully substantiate, and follow the tax advice of a trained professional.
