There are many different ways that people lie on their tax returns. Some lies are huge and glaring, such as changing your income or claiming dependents you do not have. Other lies may be slightly reducing the amount of income you make or applying for a credit or deduction for which you do not qualify so that you pay less on your taxes. Most people avoid blatantly lying and committing tax fraud. However, there are small, little lies, that many taxpayers make every year on their tax returns without realizing they could have negative consequences in the long run.
Common White Lies on Tax Returns
The place where most people start to fudge their tax returns comes from not taking the time to accurately calculate for deductions. One common example is deducting work mileage on your personal automobile. Many people that are qualified for this deduction end up simply guessing, which ultimately means they have nothing to back up the claim. It is important that you have some sort of tracking method that you can use come tax time. This not only will make it easy to accurately calculate your mileage while also having the proof you need in case of an audit or other inquiry. Any other business expenses that you plan to deduct, including home office, travel, meals, and more, also need to be legitimate business expenses with receipts. If you try to claim a personal vacation as business travel expenses, then you are actually committing a type of tax fraud. However, if you go to a conference and stay a few extra days for leisure, you can claim some, but not all, of the travel expense on your taxes.
Another popular estimation that could lead to false information on a tax return is how much something is worth that is donated to charity, such as clothing or furniture. Any claims above $500 will need a receipt, which most charities will provide. It is important to keep track of these receipts if you plan to claim donations on your return. There are many other instances of estimating deductions that may seem innocent but could actually end up costing you money in the long run due to not being accurate. If you keep track of the actual dollar amount of the deduction along with any receipts or other proof, it will be easier to complete your taxes.
Nice rounded numbers appear as red flags to the IRS, telling them you have guessed rather than done the math. This could lead to an audit, which then will reveal any lies or mistakes you have made on your taxes, whether small or more significant.
If you work as a contract employee or are self-employed, it can be tempting to estimate your income or not include everything, especially income from clients that do not send you a 1099. By doing this, you may be able to lower your total income so that you pay less tax. However, this can end up coming back to hurt you. The clients or customers may declare the expense on their taxes, even if they do not send you a 1099. This means that the IRS has the information they need to see your real income, leading to an audit and penalty fees in the future. By keeping track of your income through an accounting software or hiring an accountant, you can have an accurate number to put on your tax return, whether or not you receive all your 1099s and other forms.
Those who work as an employee also need to be sure they do not estimate their income. Be sure that you accurately list your wages and salary in the line. If you have any other sources of income, whether from a second job, contract work on the side, interest from savings accounts, stock market assets, rental property, or anything else that brings you in some additional income, you must accurately account for it and include it on your income tax return.
Audits with Inaccurate Tax Returns = Penalty Fees
It is important to remember that audits are always possible. When the IRS does choose to audit you, they will look closely at all claims for deductions and tax credits. Additionally, they will check your income sources. If there is any differences in what the IRS calculates and your calculations, you will be charged this difference. Additionally, you will be charged interest and penalty fees. This can end up costing you a lot of money. If the IRS suspects fraud, rather than just an innocent mistake, they will also look at previous tax returns for any inaccuracies. This may end up costing you even more money, putting you into a significant financial crisis.
Worst Case — Fraud
Small white lies on your taxes may leave you with a big, expensive tax bill, but the wrong lies could quickly put you at risk of being charged with tax fraud. The IRS is starting to really clamp down on individual tax fraud cases. Many cases of tax fraud occur from claiming nonexistent dependents or deductions for which a person is not qualified, but it can also happen if you simply lie about your income. If you willfully and voluntarily lied on your taxes, even for a small amount, then you technically are committing tax fraud. Tax fraud is a felony charge that could put you in jail, along with having to pay a fine. Plus, you will still have to pay the rest of the tax and any penalty fees and interest. Having a felony could also make it difficult to find work or otherwise impact your life.
Saving a few hundred dollars on your taxes is not worth the fallout of any lying, even if it is just an inaccurate estimation or a small white lie. Avoid lying, especially about your income, since the IRS does have a system in place that works as a check and balance, putting you at a high risk of being discovered. There is a high chance you will be found out and end up owing money, or worse, be charged with tax fraud. If you are unsure about a deduction or claim, then discuss it with a tax professional to make sure that it is applicable to your situation. If you are scared of making any problems, then have a professional do your taxes instead.
If you are facing an audit, whether or not you have misinformation in your tax return, then you will want to prepare yourself. Download this Audit Preparation Guide from Fidelity Tax Relief that has many valuable tips.