Are You Cheating on Taxes? Here’s What Could Happen

• Find out how self-employed taxpayers often cheat on their taxes.
• Discover the larger consequences of underreported income.
• Learn how unscrupulous tax preparers cheat on taxes (and how you could become a victim).
• Find out how tax preparers use phony deductions or credits to inflate a refund.
• Find out how tax preparers may inflate the Earned Income Tax Credit.
• Learn how people are taking faked education credits.
• Learn more about the many kinds of petty cheating taxpayers regularly participate in and IRA countermeasures.

Some refer to it as “creative accounting” or just “a little fudging here and there,” but if your tax return is missing some income that should have been reported or includes overstated deductions, regardless of whether you prepared your own return or had it prepared, you are the one who is ultimately responsible. Cheating on your taxes results in unpleasant consequences. These consequences include substantial monetary penalties and the possibility of jail time for blatant cases. No one wants that.

Those who fudge on their taxes may think that they are just cheating the government out of money. In actuality, however, the government is going to get the taxes it needs from somewhere. Unfortunately, those who fudge on their taxes are causing others to pay more.

Currently, just short of 50% of all U.S. taxpayers pay no income tax. In fact, a large percentage of these folks actually get money back from the government. They receive refunds because their income is low and they qualify for certain refundable tax credits. How many of those not paying any tax are doing so because they are either not reporting all of their income or exaggerating their deductions? There are no statistics on the issue, but it would seem to be a large number.

Are self-employed individuals cheating on taxes?

If the number of Tax Court cases is any indication, the answer is yes. One of the biggest areas of cheating involves self-employed individuals not reporting cash payments. Some will even go so far as to offer discounts for cash payments. These discounts, of course, are attractive, and customers often opt for them. This enables self-employed individuals to cheat on their taxes. However, what happens if self-employed individuals get caught cheating on taxes – perhaps because their lifestyles aren’t supported by their reported income? They can end up with a nasty tax bill and penalties. Plus, when the IRS finds a cheater, it usually audits that person’s or related company’s returns for other years.

Especially troubling is knowing that some individuals who underreport their income are not just avoiding income taxes. They are also qualifying for low-income tax credits and other subsidies meant for those who really need them.

How tax preparers cheat

Fiducial tax preparers strive to provide a tax return with the lowest amount of tax due allowed under the Internal Revenue Code. There is a difference between being knowledgeable and being illegal. Unscrupulous tax preparers will cheat, and you could end up being the victim. Here are some of the schemes they pull:

• Adding phony deductions or credits – They do your return correctly and tell you what your refund is. Then, before they e-file it, the preparer adds phony deductions or credits to inflate the refund. The refund amount you expect deposits directly to your account, but the extra amount goes to their bank account.
• Inflating the Earned Income Tax Credit – Earned Income Tax Credit (EITC) is a refundable tax credit for low-income taxpayers that is based upon the amount of the taxpayer’s income from working (earned income). The credit increases up to a point as the taxpayer’s earned income increases then phases out for higher-income taxpayers. This credit is the frequent target of scams. One of the most common scams creates earned income by fabricating self-employment income of an amount that will result in the maximum EITC. Even though this may create more taxes, the EITC is greater than the taxes, netting an increase in the taxpayer’s refund.
• Taking fake education credits – Another frequent scam claims a higher education tax credit. This especially applies to the partially refundable American Opportunity Tax Credit (AOTC), using made-up education expenses. The AOTC can add up to as much as $2,500, and $1,000 of that amount qualifies as refundable.

If you were a victim of an unscrupulous tax preparer and need help filing amended returns, please call Fiducial for assistance.

What if I only cheat small amounts on my taxes?

The IRS believes any underreporting of income is serious and there really is no such thing as “petty cheating”. If the IRS audits and finds underreporting, penalties may be assessed even though the cheated amount is small.

The following lists common areas of cheating and the steps that the IRS takes to counter them.

Inflating the value of noncash goods donated to charity

This is probably one of the most commonly inflated tax deductions.

IRS Countermeasures: The IRS requires documentation from the charity. If the value of the donation equals more than $300 for the year, the IRS requires a detailed list of the items that the taxpayer contributed. The IRS will generally include charitable contributions in every audit, no matter what triggered the audit in the first place.

Claiming fictitious cash contributions

This typically involves claiming that cash was donated through a house of worship’s collection plate or holiday charity kettle.

IRS Countermeasures: All cash contributions must be verified with a bank record or a written record from the charity. Without such a record, no deduction is allowed.

Purchasing an item at a charity event

Generally, when you receive something of value for making a donation, the value of that item does not count as a deductible charitable contribution. Thus, the cost of pancake breakfasts, charity auctions, Girl Scout cookies, and the like are not deductible as charitable contributions.

IRS Countermeasures: The IRS requires charities to include the value of goods or services provided to the donor on the charity’s receipt. This makes it easy for the IRS to detect when improper deductions are being taken when it examines the receipts during an audit.

Donating cars to charity

At one time, individuals donated vehicles in poor or unusable condition and then claimed the vehicle as good or better condition and deducted the blue book value for the vehicle. This trend became so prevalent that Congress actually stepped in and limited the vehicle contribution to $500 (generally).

IRS Countermeasures: The IRS now requires the charity to issue a Form 1098-C to the donor. This form includes the information that needs to be reported if the vehicle contribution meets the requirements for a contribution greater than $500.

Using a business vehicle for personal purposes

Have you seen pickups and other trucks with company logos on their doors towing boats and trailers down the highway? There is a good chance that the drivers of these trucks are writing off the mileage through their businesses.

IRS Countermeasures: The IRS generally requires businesses, especially closely held ones, to verify the business use of their vehicles (particularly those that are suitable for personal use) with a log, including the odometer readings for the start and finish of each business use.

Deducting more home mortgage interest than entitled

Tax law limits the amount allowable for deduction for home mortgage interest to the interest paid on $1 million in debt ($750,000 for debt incurred after December 15, 2017) from purchasing or improving a home. This limit applies to a taxpayer’s first and second homes only. Many taxpayers simply take the mortgage interest from Form 1098 provided by the lender without any regard to these limitations.

IRS Countermeasures: IRS Form 1098 requires lenders to include additional information that will allow the IRS computer to determine whether the limits have been exceeded.

Making repairs on personal home and deducting the expenses on a rental or business property

It is pretty easy for landlords or owners of business real estate to make repairs on their personal homes and then deduct those repairs on their rental or business properties.

IRS Countermeasures: An auditor will look at the dates and addresses on receipts to ensure that they make sense. If an auditor catches such a violation, expect him or her to become very aggressive in other areas and to possibly invoke substantial penalties due to the intentional disregard of laws and regulations.

Falsifying investment costs to minimize gain

Until a few years ago, taxpayers decided whether or not to track their basis in the securities they owned. Many people inflated the cost before the IRS required brokers to begin tracking basis.

IRS Countermeasures: The IRS modified Form 1099-B, issued by brokers when they sold stocks, bonds, etc., to include the basis if known, and to indicate otherwise if they did not know the basis. Then, the IRS developed Form 8949 to separate investment sales into those for which the broker was tracking the basis and those for which the broker did not know the basis or wasn’t required to track the basis. The information included on these forms allows the IRS to focus on those sales for which the taxpayer was tracking the basis.

Do you have an acquaintance who has been less than honest on their tax returns in the past or has been the victim of a dishonest or inept tax preparer? Have them call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!

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