Six Ways Your Tax Preparer Knows You’re Lying
One of my responsibilities as a professional tax preparer for a big national service is to determine when a filer is providing me with false information. Although it is impossible to discover all of the false information, there is a list of typical tricks that dishonest filers try to use to decrease or avoid their tax obligation.
- Whether you prepare your own taxes or have them finished by an accountant, it is your responsibility as the filer to submit correct and true information.
- An skilled tax preparer can immediately see red flags in your information that might imply a deception or number-fudging.
- These warning flags might include combining company and personal income and spending, claiming ineligible dependents, or attempting to conceal assets abroad.
- Lying on your tax returns may result in IRS fines and penalties, as well as prison time.
One of the most apparent methods that some filers try to defraud the Internal Revenue Service (IRS) is by claiming extra deductions. When they see their tax bill or refund amount after we have done the first interview, they will ask me to delay their return because they suddenly realized some “extra costs” that they had forgotten to mention before. Then they come back with a list of these products (no receipts or supporting paperwork) and want me to insert them into the refund.
Filing a fake tax return on someone else’s behalf will result in IRS penalties for both the customer and the tax filer.
Claiming Dependents Who Don’t Qualify
Claiming a dependant or two is a sure-fire strategy to reduce any tax burden, since it may provide the filer “Head of Household” status. Taxpayers may additionally add dependency exemptions and tax credits for dependents under the age of 17. This may be a significant source of conflict for divorced spouses, particularly those who share custody of one or more children.
For many people in this circumstance, filing first and “winning” by claiming the children becomes an annual race. Of course, if one spouse incorrectly declares one or more dependents, the other spouse may alert the IRS and have the unearned refund denied. However, this procedure might take months and can be a source of frustration for the ex-spouse who should have claimed custody of the children.
The IRS has tightened the standards for filers who claim children for the earned income credit, requiring them to present extra evidence each year (beginning in 2014) demonstrating that each dependant claimed fulfilled the required support and residence tests.
President Biden’s American Rescue Plan, signed on March 11, 2021, contains adjustments to the Earned Income Credit. The earned-income tax credit will be increased for childless families only in 2021. The maximum credit amount for those without children has increased from $543 to $1,502. The age group has also been broadened. People who do not have children will be allowed to claim the credit at the age of 19, rather than 25, with the exception of select full-time students (students between 19 and 24 with at least half a full-time course load are ineligible).The highest age restriction of 65 will be removed. The phaseout rate for single filers is raised to 15.3%, and the phaseout amount is increased to $11,610.
Another method is to claim parents who do not reside with the taxpayer by presenting phony financial support statements.
Six Ways Your Tax Preparer Knows You’re Lying
Unjustly claiming dependents isn’t the only way divorcees may skew their figures.
Although child support is not deductible for payers, some filers may attempt to claim it as spousal support or alimony in the hopes that the IRS would overlook the disparity and grant the deduction. If they can’t present a divorce judgment proving that the payment is alimony, they shouldn’t deduct it on any tax return.
Filers who do not disclose their income might not only reduce their tax burden, but also get unemployment benefits. Those who record unusually low income for the year will raise a red flag, particularly if they claim dependents. In some situations, they are receiving nontaxable child support or state and/or federal assistance, although many of these filers also worked for wages. Because of the increased payroll tax, this sort of income is more tempting to disregard.
Personal vs. Business Expenses
Breaking out business vs personal usage for items like automobiles and office equipment might be difficult for some clients. Customers who increase these quantities or percentages for business usage multiple times tend to raise my suspicions unless they can provide clear examples of greater utilization.
Cheaters who are more inventive may set up a bogus corporate organization to which phony costs are ascribed.
Some customers believe that investment or other income earned in foreign countries may be excluded from their tax return. If they are citizens of the United States, this is not the case.
Any client who tells me what they did during their time away, or if they lived in another nation for a significant amount of time but had no income from there, should be properly questioned and recorded.
If the IRS Catches You
Of course, the regulations specify unequivocally that if a tax filer deliberately puts fake information on a tax return prepared for a client and submits it, both the customer and the filer will face disciplinary action, if not criminal consequences (if the IRS discovers it).In addition, the customer will be charged interest and penalties on the amount of tax that should have been paid.
Customers should be notified that including significant deductions on their tax returns may raise the likelihood of being audited. If an audit occurs, the IRS will reject any deductions or other incentives for which there is no documentation, even if the expense was lawful and paid.
The IRS may next opt to examine subsequent years of the client’s returns to see whether they, too, cheated. If you intend to file false returns, you should be aware that whistleblowers may expose tax evaders to the IRS, which will pay a reward of up to 30% of the excess tax, fines, and other monies collected.
The Bottom Line
Taxpayers who attempt to cheat on their taxes are inviting problems. If they are found, the repercussions greatly exceed what they are hoping to earn.
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