This tax season, the IRS is once again warning taxpayers about the temptation to falsely inflate deductions or expenses on tax returns.
Taxpayers should think twice before overstating deductions such as charitable contributions, padding business expenses or including credits that they are not entitled to receive, such as the Earned Income Tax Credit or Child Tax Credit.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.
“Increasingly efficient” automated systems generate most IRS audits. The IRS can normally audit returns filed within the last three years. Additional years can be added if substantial errors are identified or fraud is suspected. Although there is no way to entirely avoid an audit, preparing an accurate tax return is a taxpayer’s best defense.
- • 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
- • $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return,” which does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
- • In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.
Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as:
- • Tax evasion
- • Willful failure to file a return, supply information, or pay any tax due
- • Fraud and false statements
- • Preparing and filing a fraudulent return
- • Identity theft
Criminal prosecution could lead to additional penalties and even prison time.
Using tax software is one way for taxpayers to ensure they file an accurate return and claim only the tax benefits they’re eligible to receive. IRS Free File is an option for taxpayers to use software to prepare and e-file their tax returns for free.
Community-based volunteers at locations around the country also provide free face-to-face tax assistance to qualifying taxpayers.
Taxpayers should know that they are legally responsible for what is on their tax return, even if it is prepared by someone else.
Visit IRS.gov for tips on choosing a tax preparer, as well as information about expenses and audits.