Whether you’re expecting a tax refund this year or simply hope to owe as little as possible, it can be tempting to fudge the numbers in your favor. However, what you might consider to be a little white lie on your taxes could count as tax fraud in the eyes of the IRS.
Tax fraud occurs when a person willfully attempts to evade the tax code. In other words, they lie. If someone makes a genuine mistake, it’s considered negligence. That’s usually not as bad as committing flat-out fraud, but it’s not great, either.
The IRS estimates that about 17 percent of taxpayers fail to comply with the tax code in some way, though less than 1 percent of taxpayers are actually convicted of a crime.
“Whether a mistake made on a tax return is mere negligence or rises to the level of fraud is something that an attorney or other legal professional could advise you on,” said Logan Allec, a CPA and owner of personal finance site Money Done Right. “But the best course of action is making sure that such glaring mistakes don’t appear on your tax return in the first place.”
Here are some common mistakes to avoid so you don’t accidentally commit tax fraud.
1. Not Reporting All Of Your Income
Sure, you report all the earnings from the W-2 your job sends you (after all, the IRS gets a copy). But the extra few hundred dollars you made in tips or through freelancing? Maybe you “forgot” to include that income this year.
“Having another source of income on the side that is not wage income and failing to report it is a common mistake taxpayers make,” said John Little, an accounting professor with the Samuel Curtis Johnson Graduate School of Management at Cornell University.
The IRS requires businesses to send a form 1099 when they pay someone more than $600 during the year. However, even if you earned less than $600 ― or never received a 1099, regardless of the amount ― you still have to report the income.
That goes for income from bank account interest, investments, rental property, gambling winnings and more. There’s a chance the IRS won’t know about extra earnings you decided not to include, but if you are caught underreporting your income, there are hefty penalties involved.
2. Overvaluing Non-Cash Donations
Recent tax laws eliminated quite a few deductions, but one that’s still available to taxpayers who itemize is the charitable donation deduction. That’s a write-off that can be tough to value ― and easy to exaggerate.
“Non-cash charitable donations is one area where I see taxpayers embellishing the truth a bit,” Allec said. For example, say you donate a few boxes of clothes and toys to your local Goodwill or Salvation Army. They hand you a receipt that lists what you gave, except the thrift shop usually doesn’t estimate the actual value of your donations. That’s up to you.
“Some taxpayers see this as a blank check to claim, say, a $500 deduction for a box full of old, stained clothes,” Allec said. “Sorry, but that’s flat-out lying!”
It’s important to be honest with your estimate. When valuing your donations, Allec recommended asking yourself: How much would a reasonable person really pay for these items? “That’s how much you should take as a deduction,” he said.
3. Fudging Your Other Deductions
In addition to charitable donations, there are a few other tax deductions that taxpayers can claim if they qualify to itemize taxes instead of taking the standard deduction. In that case, it might be tempting to inflate the value of those deductions, including medical expenses, work-related education expenses and other miscellaneous deductions.
“With the Tax Cuts and Jobs Act, some of these mistakes may be less common,” Little said. That’s because fewer people will be able to itemize deductions now that the standard deduction has been raised to $12,550 for individuals and $25,100 for married couples. “There are tougher rules on business expenses as well,” he said.
4. Stretching The Truth On Business Expenses
Speaking of businesses, this is another area where taxpayers might stretch the truth on their returns. “Common examples here might be [deducting] the entire cost of an automobile, when it is only partially used for business,” Little said. Another one is reporting personal expenses as business expenses, such as a personal cell phone or entertainment expenses.
“While there are significant tax benefits available to business owners, this doesn’t mean that they can start writing off all of their expenses like there’s no tomorrow,” Allec said.
If you do have expenses for items you use for both personal and business purposes ― a phone, car, utilities, etc. ― the proper thing to do is determine what percentage of total time that expense is used for business purposes and deduct that percentage on your return.
5. Failing To File Tax Returns
According to Allec, some people go beyond simply fudging the numbers and fail to file their tax returns at all. “Intentionally doing so is, in fact, a criminal offense,” he said. “You’d better be safe than sorry, so make sure Tax Day doesn’t pass you by without filing (or extending) your return.
How Can Tax Filers Avoid Tax Fraud Or Negligence?
Whether you intentionally lie on your tax return or simply make a mistake, those errors can potentially lead to expensive consequences. So rather than taking the chance your return is incorrect, take extra steps to ensure its accuracy.
Keep good records: You might be tempted to fib on your tax return simply because you aren’t sure what the actual numbers are. Keep detailed records so you know exactly what to claim. “If you own a business or a rental property, use a simple bookkeeping platform like Quickbooks Online or Intuit to track your income and expenses,” Allec said.
Work with a qualified tax professional: Tax law is complicated and sometimes you just don’t know what you don’t know. Even so, “ignorance of the law doesn’t exempt you from it,” Allec said. So if you feel like your tax situation is a bit more complex than you can handle, consider working with a qualified tax professional in your area.
Know the rules: If you do decide to DIY your tax return, be sure you fully understand the rules of a certain credit or deduction before claiming it. And don’t put your fate in the hands of Google. “Look for answers in the IRS publications that are published every year on various tax topics,” Allec said.
What To Do If Your Tax Return Is Wrong
So what should you do if you realize there is incorrect information on one of your past tax returns? According to Allec, the first thing you should do is gather all relevant data so you can determine the extent of your errors.
Often, you can file a form 1040X for that year to fix relatively simple errors. If you underpaid your taxes, the IRS will assess penalties and interest on the balance due. “A sizeable error is likely to motivate IRS to investigate further,” Little said.
When in doubt, however, it’s a good idea to call the IRS hotline at 1-800-829-1040 and speak with a representative there about the situation. “Generally, when it comes to the IRS, it’s best to be honest and forthright about mistakes,” Allec said. “Often, the situation will be easier to remedy than you originally thought.” And if it isn’t? “It may be time to hire a tax professional,” he said.
This article has been updated to reflect changes in IRS policies.