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.
- Whether you prepare your own taxes or send them out to be completed by an accountant, it is up to you, the filer, to provide accurate and truthful information.
- An experienced tax preparer will easily identify red flags in the information you provide that could indicate a lie or fudging the numbers.
- These red flags may include commingling business and personal income and expenses, claiming unqualified dependents, or trying to hide assets overseas.
- Lying on your tax returns can result in fines and penalties from the IRS, and can even result in jail time.
One of the most obvious ways that some filers attempt to deceive the Internal Revenue Service (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.
Knowingly filing a false tax return on someone else’s behalf will cause the IRS to discipline both the customer and the tax filer.
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. With dependents, taxpayers are also able to add dependency exemptions and tax credits for dependents under age 17. 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 who 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.
The American Rescue Plan, signed by President Biden on March 11, 2021, includes changes to the Earned Income Credit. For 2021 only, the size of the earned-income tax credit will increase for childless households. The maximum credit amount for childless people increases to $1,502, from $543. The age range has also been expanded. People without children will be able to claim the credit beginning at age 19, instead of 25, with the exception of certain full-time students (students between 19 and 24 with at least half a full-time course load are ineligible). The upper age limit, 65, will be eliminated. For single filers, the phaseout percentage is increased to 15.3% and phaseout amounts are increased to $11,610.
Another dodge is to claim parents who do not live with the taxpayer by showing false statements of financial support.
Six Ways Your Tax Preparer Knows You’re Lying
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 shouldn't be deducting it on any return.
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.
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.
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 U.S. citizens.
Any customer that gives me information about what they did during their time away, if they resided in another country for any material period, but have no income from there, that information should be closely questioned and thoroughly documented.
If the IRS Catches You
Of course, the rules clearly state that if a tax filer knowingly enters fraudulent information on a tax return that they prepare for a client and submit it, then both the client and the filer 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.
Customers should be informed 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 incentives 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 whistleblowers can report tax cheats to the IRS, which will pay a reward of up to 30 percent of the additional tax, penalties, and other amounts that it collects.
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.