Best Practices to Avoid Committing Tax Fraud
You probably consider yourself a good citizen and an honest person. You would never steal or intentionally cheat anyone, and, of course, you file and pay your taxes on time every year. You certainly don’t think of yourself as the type of person who would commit tax frauds. But are you certain that the IRS would agree with you?
What is Tax Fraud?
According to the IRS, tax fraud is “intentional wrongdoing on the part of a taxpayer with the specific purpose of evading a tax known or believed to be owing.” Sometimes that looks like a shady criminal keeping two sets of books for a business. But often tax fraud looks like an ordinary person who harmlessly shades the truth a little on their income tax return, or fails to provide complete information to the IRS.
Those “harmless” misrepresentations and omissions could turn out to be anything but harmless. Tax fraud penalties include fines of up to $100,000 and up to three years in prison, plus a penalty of 75% of the amount of tax you failed to pay due to the fraud.
Whether a misrepresentation on your tax return is an intentional act to get out of paying taxes you owe, or a simple mistake, it could still lead to an audit. Here are some important steps you can take to avoid committing IRS tax fraud.
Surprising Ways You Could Be Committing Tax Fraud
There are a number of ways that you could be committing tax fraud — even if you’ve never thought of it as such. Do you recognize yourself in any of the following scenarios?
Failing to Report Income
Failing to report income is one of the most common ways people commit tax fraud. Failing to report income often looks like working “under the table” or failing to report cash tips. But just because income is in cash, irregular, or hard to track doesn’t mean you are not obligated to report it. If you are a tipped employee, learn about reporting tipped income.
Omitting Information or Providing Incorrect Information on Your Return
You might be entitled to a tax credit and may claim it on your income tax return. But if you don’t provide the correct supporting information, you could get flagged for an audit. Most tax preparation software can help you avoid these mistakes, as can a professional tax preparer — who will also ask questions to help you find even more ways to minimize your tax burden.
Claiming Deductions You’re Not Entitled To
The tax code has changed a lot over the last few years, and some deductions you used to take (like job-related expenses) may no longer be allowed. A professional tax preparer can help you avoid disallowed deductions, while steering you toward deductions for which you may qualify.
Inflating the Amount of Deductions
Since the standard deduction was increased a few years ago, you need to be able to claim more deductions in order for it to be worthwhile for you to itemize deductions. The temptation exists to inflate the value or amount of goods that were donated to charity, or to otherwise claim more in deductions than you are entitled to. Should you be flagged for an audit, though, you will need to be able to back up the numbers you claim. Keeping records of every small donation or deductible expense may seem cumbersome, but you will be glad to have those records if the IRS asks for documentation.
Failing to Investigate Tax Shelters
You may have decided to take advantage of tax shelters to reduce your taxable income. A tax shelter is simply a mechanism for reducing your amount of taxable income. Some tax shelters are perfectly legal, like putting pre-tax income into a 401(k) plan offered by your employer. However, not all tax shelters are aboveboard, and some are downright illegal or fraudulent. It is your responsibility to investigate any tax shelter “opportunity” you are offered to make certain that it complies with the law and IRS regulations. Best practice is to invest only in tax shelters offered by reliable sources.
Choosing the Wrong Tax Preparer
In the course of this blog post, we have repeatedly recommended using a professional tax preparer. As we offer tax preparation services, that may seem self-serving, but working with an experienced professional really is the best way to avoid errors and audits. A professional tax preparer may even be able to save you money on your taxes. But not all preparers are created equal.
Technically, all that is needed to hold oneself out as a tax preparer is a Preparer Tax Identification Number (PTIN) issued by the IRS. Some tax preparers have little more than a high school diploma or GED. Others are Certified Public Accountants, enrolled agents with the IRS, or attorneys.
Beware tax preparers who charge you based on the size of your refund; they may be artificially inflating deductions or taking other fraudulent measures to increase your refund (and their fee). And you should absolutely refuse to work with a “ghost” preparer who does not want to sign your tax return with their identifying information. You are on the hook for any errors (or fraud) in your tax return, and it is worth it to pay an experienced, trustworthy preparer.
Some professional tax preparers really stand by their work, even appearing with you before the IRS or other tax authorities if necessary for an audit or other investigation. In general, the more complex your tax situation, the more helpful it is to have a highly-credentialed preparer.
The Bottom Line
Working with an experienced professional tax preparer is the best way to minimize your tax burden while avoiding IRS tax fraud. We invite you to schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.