Rising taxes, a slow economy and the costs of Obamacare have tempted some taxpayers to try to cut corners with Uncle Sam.
As a professional tax preparer for a major national service, one of my jobs is to recognize when a filer may be giving me fraudulent information. Although it’s not possible to catch all the bogus information, there is a list of common dodges that dishonest filers attempt to pull to reduce or avoid their tax bill.
1. False Deductions
One of the most obvious ways that I see some filers attempt to deceive the IRS is when they try to claim additional deductions. When they see their tax bill or refund amount after we have finished the initial interview, they will have me put their return on hold because they suddenly remembered some "additional expenses" that they forgot to include before. Then they return with a list of these items (without any receipts or supporting documentation) and ask me to enter them into the return.
I’ll politely inform customers that adding these types of unsubstantiated expenses will increase the chances of being selected for an audit. If the client isn’t taking the hint, I have to refuse to file the claim. Knowingly filing a false tax return on someone else’s behalf will cause the IRS to discipline both the customer and me.
2. Claiming Dependents Who Don't Qualify
A sure-fire way to lower any tax bill is to claim a dependent or two, since it can give the filer “Head of Household” status, which gives a larger standard deduction, and adds dependency exemptions and tax credits for dependents under age 17. Obviously, this can be a major point of contention for divorced couples, especially those who share custody of one or more children.
For many in this situation, it becomes a race each year to see who can file first and “win” by claiming the kids. Of course, when one spouse claims one or more dependents unjustly, the other spouse can notify the IRS of the violation and have the undeserved refund disallowed. However, this process can take months and can be a headache for the ex-spouse that should have claimed the children.
The IRS has tightened up the rules for filers who claim kids for the Earned Income Credit by requiring them to provide additional documentation each year starting in 2014 that shows that each dependent claimed met the proper support and residency tests.
Another dodge is to claim parents who do not live with the taxpayer by showing false statements of financial support.
3. Divorce-Related Fraud
Claiming dependents unjustly isn't the only way that divorcees can fudge their numbers.
Although child support is nondeductible for payers, some filers will still try to claim this expense by stating that it is spousal support or alimony in hopes that the IRS won’t notice the discrepancy and will allow the deduction. If they cannot produce a divorce decree that shows that the payment is alimony, then they won’t be deducting it on any return that I prepare.
4. Income Fraud
Filers who fail to report income can not only lower their tax bill, but also collect unemployment benefits. Those who report abnormally low income for the year will trigger a red flag, especially if they are claiming dependents. In some cases, they are receiving child support or state and/or federal assistance that is nontaxable, but many of these filers also worked jobs for which they were paid in cash. This type of income is especially tempting to omit because of the additional payroll tax.
5. Personal Vs. Business Expenses
Breaking down business versus personal use for things such as vehicles and office equipment can be a very gray area for some customers. Customers who increase these amounts or percentages towards business use several times tend to arouse my suspicion unless they can cite specific additional instances of use.
More creative cheaters might create a dummy business entity to which false expenses are attributed, and I will disallow all such reporting if I sense that the business is not real.
6. Oversesas Investors
Some clients think that investment or other income that they earn in other countries can be left off their tax return. This is not the case if they are a U.S. citizens.
I will closely question and thoroughly document the information a customer gives me about what they did during their time away if they resided in another country for any material period, but have no income from there.
If the IRS Catches You
Of course, the rules clearly state that if I knowingly enter fraudulent information on a tax return that I prepare for a client and submit it, then both the client and I will be subject to disciplinary action or even criminal penalties (if the IRS discovers it). The client will also be subject to interest and penalties on the amount of tax that should have been paid.
I inform the customer that adding substantial deductions to the return may increase the chance that they will be selected for an audit. If an audit happens, then the IRS will disallow any deduction or other incentive for which there is no proof, even if it was a legitimate expenditure that was actually paid.
The IRS may then decide to audit other years of the client’s returns to see if they cheated on those, too. And if you plan on filing fraudulent returns, you should know that the IRS now pays a reward of 15 percent of any amount of tax that is collected to the whistleblower that reports you – which I may do if I see that you are determined to file a fraudulent return with someone else (because I won’t file it myself).
The Bottom Line
Taxpayers who try to cheat on their taxes are asking for trouble. If caught, the consequences they face usually far outweigh what they’re attempting to gain.
For more information on how to correctly file your tax return or the consequences that you could face for cheating, visit the IRS website or consult your financial advisor.