Can I Get In Trouble Criminally For Taking Too Many Deductions?

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It is not uncommon for an auditor to discover tax deductions that taxpayers were not entitled to claim. When this happens, the IRS will typically assess fines and tax penalties. However, in egregious cases, they may also pursue criminal charges that can result in jail time. Nationwide, it is estimated that up to 17% of taxpayers are not in compliance with the tax code and could face either civil or criminal penalties during an audit.

Overstatements

Sometimes called “padding,” overstating deductions include claiming charitable donations, deductions for dependants, business losses, etc. that don’t qualify per IRS guidelines. Individuals who overstate tax deductions can be charged with preparing and fraudulently filing a tax return. They may also be assessed a $5,000 penalty for filing a frivolous tax return.

The Penalties for Negligence & Fraud

The IRS reserves the right to tack on additional penalties if they feel the taxpayer negligently reduced their tax liability. These penalties can amount to 20% of the amount owed. The IRS will assess this penalty if the total amount of deductions claimed is greater than 10% of the amount due, or if the amount understated for the total tax liability exceeds $5,000.

One of the most common problems is the home office deduction. If the IRS believes you have erroneously claimed a home office or other deduction, they can assess a fine of between $500 and $5,000.

However, this penalty can jump to 75% if it is determined that the taxpayer deliberately attempted to fraudulently reduce their tax liability.

Fraudulent actions such as using false Social Security numbers, maintaining two sets of books, falsifying personal expenses, etc. can lead to criminal charges and jail time.

Penalties for Failing to Pay & Tax Evasion

The “Failure-to-Pay” penalty is .5% of the amount owed for every month past its due date. This maxes out at 25% of the amount owed.

A charge of tax evasion is considerably more serious. While fines are the most common penalty the government assesses, a charge of tax evasion can carry a penalty of up to five years in federal prison in addition to a fine of up to $250,000.

Preparing for an Audit

Individuals whose personal or corporate taxes are being audited should consult with a tax attorney who can help guide the individual through the tax audit process. Because the potential for significant fines and potential criminal liability exists, it is crucial to have legal representation throughout the proceedings.