From small mistakes to outright lies – what happens when you lie on your taxes? Let’s go over the consequences of tax fraud.
How Does the IRS Know?
Thinking you can get away with lying to the IRS is always a bad idea. But how do they actually know that you’re lying and committing tax fraud? Essentially, they get a copy of your tax documents during tax time. So if you get a tax form in the mail, say your W2, it’s like the IRS does, too. As a result, they’ll be expecting tax returns and already have a pretty good idea of how much you will owe.
Consequences of Lying on Your Tax Return
So, what are the consequences? Not surprisingly, the severity of consequences can depend on how much was altered on the returns. Let’s go over the different potential consequences.
The IRS Identifies Discrepancies and Sends You a Notice
This is the simplest and mildest IRS response. As the IRS processes your return, they will automatically check for discrepancies between your return and the information the IRS has on file about you. As mentioned above, they get the same tax documents from your employers, banks, and other third parties.
If they notice something is amiss, they will flag anything that looks wrong and send you a CP2000. This notice is not a formal audit but a notice that the IRS is proposing a change to your tax return.
The IRS Audits You
Being audited by the IRS means they are trying to verify the information you included on your tax return. Audits are triggered by anomalies, which could be a small mistake or a bigger, patched-up lie. If you were honest when submitting your return, you may avoid or easily pass an audit.
You Lose Tax Credits and Deductions in the Future
If the IRS audits your return and determines that you wrongfully claimed credits or deductions, you could be barred from using them again in future returns for up to 10 years. If you wrongfully claimed the Earned Income Credit (EIC), you could also have to pay back the EIC portion of your refund.
Depending on your situation, you could also face civil penalties. These penalties and interest rates vary based on the severity of the situation. The bigger the tax fraud, the bigger the fine.
If you made a simple error and the IRS adjusted it, you might not have to pay any penalty, or you may have to pay a small one. A bigger error, and you could face the negligence penalty, which is 20% of additional tax. Even bigger, and you could face the fraud penalty, which is 75% of additional tax due to fraud.
In rare cases, the IRS could press criminal charges. The IRS prosecutes a few cases each year, and they usually involve large omissions of income, tax evasion, tax protest schemes, or lying to the IRS in an audit. The IRS takes these cases very seriously, with an average jail time of over three years. So if you make a mistake on your tax return, don’t fret. You won’t do any hard time for making a math error.
What if it was an Accident?
But what if you make a mistake and didn’t intend to deceive the IRS? This is where willful acts of fraud vs. negligence comes in.
Willful acts of fraud are acts made with the intent to deceive the IRS. Negligence is a careless mistake. In order to tell the difference, auditors are trained to spot intentional fraud. Examples include a business with two sets of books or with no records at all, false receipts, and checks altered to increase deductions.
If the auditor does find intent, it may be considered tax fraud, and you could be subject to any of the penalties listed above. If the auditor determines the discrepancy was due to negligence, you could be fined at a lower rate.
What Do You Do if you Make a Mistake on Your Taxes?
If you realize you’ve made a mistake, you should let the IRS know as soon as you realize. You may be able to file an amended tax return to fix the error. If you file the amendment soon enough, you may not have any repercussions. However, if you didn’t catch and report the error in time, you could face penalties, fines, and other consequences.
Let Gaylor Tax Services be here to help you with your tax needs.
Let Gaylor Tax Services Help You
Taxes are complicated, but making a mistake could cost you. Hiring a tax pro can not only help make sure your tax return is correct but also help you pay the lowest amount of tax, and get the largest refund you’re legally allowed (so no need to commit tax fraud).
At Gaylor Tax Services, our experts are here to answer your questions and guide you in the right direction for financial success. No matter what, don’t hesitate to contact us. We are located in Phoenix, Arizona but can assist you anywhere in the state.