More often than not, a lot of people commit tax fraud without even realizing it.
The tax laws change every year, and if you are not familiar with it or keep yourself updated, you just might be a victim eventually.
Usually, these mistakes happen due to negligence than ill intent, and it is advisable always to cross-check your return before you file your taxes, to ensure that what you are doing is legal and you are not accidentally committing a fraud.
Whether deliberate or a simple mistake, tax fraud attracts grievous repercussions from the IRS, so you might want to take a second look at your account.
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.”
An individual or business entity that falsifies information to limit the amount of tax could be arrested for committing tax fraud. This could cost you hundreds of thousands of dollars and years in jail.
To avoid finding yourself in this fix, here are ten ways to know if you are accidentally committing tax fraud.
1. Putting the wrong information
Putting the wrong information on your account could cause a serious problem later. Often times, people forget to fill a part of the return or fill it incorrectly.
This includes omitting or incorrectly entering essential data like Social-Security-number or recording your deductions in the wrong column.
Even if it were a mistake, it could be seen as an act of deliberation to attempt tax fraud.
To avoid putting wrong information, simply implement a tax preparation software that won’t allow you to submit your forms without entering vital data.
You could also hire professional tax preparers who are more familiar with it.
2. Inaccurately demanding the acquired income tax credit
The income tax credit is for low to moderate earners, as it helps them ease the load of Social Security taxes.
To qualify, you must meet certain criteria, which changes often and must be reviewed to avoid claiming it incorrectly.
You could be eligible with the previous year’s criteria but no longer eligible with the updated criteria.
So, it is important that you do not rely on an outdated rule, as it could draw the attention of the IRS.
3. Math errors
One or more math errors in your tax return could affect your overall calculations and result in an incorrect sum of the tax you owe.
This could suggest tax fraud to the IRS, and you are not safe.
To avoid this, always double check every figure before you include it in your tax return to avoid miscalculating your total income and changing your actual liability.
If it is a one-time thing, it could be dismissed as an error, but there will be suspicions if the same mistake keeps recurring.
Implementing tax software will help reduce the risk of math errors by pointing out the inconsistencies in your calculation.
4. Tax shelters abuse
While tax shelters could help minimize your taxes, they could also be abused, which could be accounted for as tax fraud.
Too-good-to-be-true tax shelters often deceive many taxpayers looking out for tax shelters from wealth planners and accountants.
Some of these tax shelters often do not correlate with the financial status of the taxpayer, which could result in accidentally committing tax fraud.
To avoid this, always avoid tax shelters that do not match your financial needs.
The IRS releases a “Dirty Dozen” list of tax scams yearly to help keep taxpayers in check when settling for a tax shelter.
If you are not careful, you might end up spending more to cover up for back taxes, interest, and penalties, in the bid to avoid or minimize your tax.
It could also cost you a fine and a jail sentence if it is recorded as tax fraud or avoidance. Debt freedom relief management could be a good option to eliminate tax debt.
5. Improper form
The effect of double-checking your form before sending cannot be overemphasized, as it could save you time, effort and money.
It is possible that you picked the wrong 1040 form while in a rush, and this could affect your entire tax return details.
Always check the form before you fill it.
And if it turns out that you picked the wrong form, you will have to file an amended tax return, which must be mailed directly to the IRS or to any direct address suggested by the IRS.
6. Claiming the wrong deductions
Before you deduct an expense, ensure it is necessary.
This is especially for small business owners or self-employed persons who are allowed to deduct business expenses where necessary.
In a bid to deduct expenses, it could be tricky to deduct random expenses that aren’t business related.
Examples include vacation expenses or home groceries.
If you are caught, you could be imprisoned for 3 years, with a fine of $100,000.
Using the tax prep software could help prevent this by showing you the necessary deductions. Also, understand the rules and be honest.
7. Taking inflated tax deductions
The IRS frowns at taking inflated tax deductions.
While it is understandable that you need to cut your taxes as much as you can, it is also vital that you do not make them up or artificially enhance the one you have.
Before you claim tax deductions, be sure that you are eligible and also, try not to overinflate it.
Don’t falsely claim deductions, expenses or even credits on tax returns.
With the increasingly efficient IRS automated systems, you could be liable to penalties for taking inflated tax deductions.
Some of these penalties include a $5000 fine, 20% of the disallowed amount and 75% of the amount owed in addition to the full income tax owed.
To avoid this, you have to be sincere with the numbers and probably work a payment plan with the IRS on how best you could pay what you owe, if you can’t do it all at once.
8. Unreported income
You might not be able to record all your tips when filling your tax, especially if you do contract or freelance jobs.
However, this doesn’t mean you should be nonchalant about it, as unreported income to the IRS could also be counted as tax fraud.
Although with multiple streams of income, it is easy to hide your income from the government, you are still required to disclose and report every tip, as failure to do so may be building up for impending danger.
An unreported income that is later found could cost you a penalty equivalent to 50% of the taxes you owe in Medicare, Social Security, and Railroad Retirement taxes on unreported income.
It could also cost you $250,000 fine and about 5 years in prison.
This can be avoided by keeping an updated record of all tip income received and report them.
9. Victim of fraudulent by the tax preparer
While a tax preparer is meant to be a professional to help with your tax returns, you could easily fall into the trap of tax preparer fraud.
Since they will be helping with the calculating, filing and signing of your tax return, they will have access to your personal financial details, which is a very crucial aspect of your life and/or business.
This is the first important reason why you should choose yours wisely if you are looking to hire one.
Although many of them are professionals and will handle your tax return in the best way, getting into the wrong hands could get you into trouble.
A fraudulent tax preparer will likely dupe you into committing tax fraud, without you realizing.
The penalty for this often falls back on the tax preparer, but you could also be a victim if you were found to be involved in the scamming process.
This can be avoided by hiring a professional, which can be vetted online via the IRS Directory of Federal Tax Return Preparers by using the details of his credentials.
10. The bottom line
Errors happen all the time, but they can be avoided by simply double checking.
And if you ever fill the wrong form, you will have to file an amended tax return or get reviewed by an IRS.
The good news, however, is that the IRS takes into account possible mistakes that could happen while filing the tax return.
These accidental mistakes are not outrightly considered as a fraud; the IRS has to carefully review the case before drawing a conclusion if it should be charged as tax fraud or identified as an accidental mistake.
The tax preparer software is available on the IRS website for free, to help you file your tax return properly, with little or no mistakes in the process.
This could save you a lot of future hassles.
Being charged for tax fraud will not only cost you time, effort and money but also your reputation and records with the IRS.
No one ever wants to have an issue with the IRS, as it never turns out pleasant.
Watch out for these common mistakes often made while filing a tax return and ensure you are on track.