Tax Hacks 2016: Would You Cheat on Your Taxes?

Have you ever been tempted to cheat on your taxes, even if by just a small amount? Here’s why that’s not such a good idea.

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Taxes are a pain — both the annual ritual of figuring out what is owed to the IRS and the process of giving it up. It’s no surprise that carping about taxes is a national pastime.

Still, as a matter of principle, the vast majority of Americans disapprove of cheating on taxes: In the 2014 Taxpayer Attitude Survey, released by the IRS Oversight Board, 86 percent of the 1,002 respondents said that cheating on taxes is unacceptable. Only 11 percent were tolerant of cheating “a little here and there or as much as possible.”

The IRS estimates that just over 83 percent of Americans file and pay the amount they owe on time. The result — the best estimate for what is missing is called the “tax gap” — is a total tax liability of $2.66 trillion in 2006 (the latest year for which there is an estimate) according to Treasury Department analysis.

From our Solutions Center: Help with tax debt

Failing to pay the legally required amount can be a result of fraud or negligence — and the penalties for intentionally underpaying taxes are far higher — but we don’t recommend either one. The process of rectifying taxes with the IRS is painful and expensive — and is to be avoided. Read on.

Head-in-the-sand approach will not work

First, if you are somehow in denial about taxes and fail to file, know that it is unlikely to escape the notice of the IRS. According to an expert interviewed by U.S. News and World Report:

“You have people who blow it all off, and they get a letter from IRS, and they freak out,” says Harry Krampf, an enrolled agent licensed by the Internal Revenue Service and owner of TaxVigilante.net. He notes that if you’re already in this situation, the best thing to do is reply to the IRS right away, resolve the matter and make sure not to repeat the mistake.

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All of your income counts

Any income generated throughout the year is taxable, but many people don’t comply with that rule.

While you may fly under the radar for the unreported $40 profit you made when you sold an item at last year’s yard sale for more than you originally paid for it, other forms of unreported income may get you into some trouble.

People also attempt writing off items such as commuting expenses to and from work, unqualified business expenses, legal fees and medical expenses for pets to reduce their taxable income.

And let’s not forget about those who earn a large portion of their income in cash. Some 84 percent of food servers underreport their income from tips.

Common tax cheats

The means of cheating is — for middle-class cheaters — pretty mundane, as  NOLO explains in this article:

Most people cheat by deliberately underreporting income. A government study found the bulk of the underreporting of income was done by self-employed restaurateurs, clothing store owners, and — you’ll no doubt be shocked — car dealers. Telemarketers and salespeople came in next, followed by doctors, lawyers (heavens!), accountants (heavens, again!), and hairdressers.

Self-employed taxpayers who over-deduct business-related expenses — such as car expenses — came in a far distant second on the cheaters hit parade. Surprisingly, the IRS has concluded that only 6.8% of deductions are overstated or just plain phony.

The IRS is cracking down

The IRS has stepped up its effort to detect the underreporting of income, particularly by small businesses. While you will more than likely not be singled out by Uncle Sam, there are red flags that can make you appear to be hiding income or taking deductions you’re not entitled to.

So, it’s important to protect yourself by:

It’s also important to note that being victimized by a scam does not necessarily get you off the hook; you are still the one to blame until the IRS decides otherwise.

Hefty penalties await those who cheat

If you are caught underpaying taxes that you owe, whether through dishonesty or ignorance, your wallet could take a beating. The IRS assesses a penalty of 20 percent of the net understatement of tax for “substantial understatement” and “negligence or disregard of the rules or regulations” violations.

On the other hand, frivolous returns are subject to a $5,000 fine, and civil fraud penalties amount to 75 percent of the understated outstanding tax liability and could result in criminal prosecution.

While it may be tempting to cheat on your taxes to save money or get that large refund, it definitely isn’t worth it. And if you do decide to test your luck, you may find yourself among that 1 percent whose returns are audited.

What is your attitude about filing taxes on income that is off the books? Share with us in comments below or on our Facebook page.

Kari Huus contributed to this report.

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Comments

  • Vince Ryder

    I’ve done my own taxes since 1986, except for a single year when I tried out a service that didn’t seem worth the money. The tax code is ridiculously complex and completely honest people can make mistakes on non-trivial returns either through not learning of year-to-year changes before filing, or by misinterpreting the language in the instructions. I’ve never been audited, so I suppose I must be doing mostly accurate returns, but the effort is time-consuming. The benefit however, of doing this myself is that it makes me a better financial planner, and also gives me a better feel for the value of real estate, depreciation, and expense tracking, so I’d say the extra time is worth it. I would never cheat on taxes, although if there’s a grey area in the instructions, I’ll probably interpret it to my advantage, as long as I have a reasonable explanation (logical). On the other hand, if I ran an actual business (not just rental real estate-2nd home), I would probably get some accounting services so I could focus better on generating income instead of reporting it.

  • whattarush

    I wouldn’t even know how to cheat on my taxes. I wish there were a better way of treating us all fairly. Some people don’t pay anything, because they have enough money that they can write off everything to the point that the government owes them for merely existing! Then, there are the big corporations who don’t pay their fair share, like setting up a bogus headquarters in another country or being enticed to set up shop in a city where there taxes are forgiven. All of this really needs to change.

  • dogman

    What about all these corporations who make billion dollar profits and pay no income tax? I think GE is one of these!

    • whattarush

      So is the NFL.

      • eyeRollz

        Not anymore. They gave up their non-profit status.

        • whattarush

          Yay!

  • Kent

    Simplify, simplify, simplify. Taxes should be so simple there is no opportunity to cheat and no reason to pay to have them prepared.

    • Sandra Sandy

      Well… I agree 100% but there are some lobbyists out there that would disagree. There’s a lot of money to be made in the status quo. I know several of my CPA friends voted for Obama in 08 soley due to all the talk on the right about restructuring the tax code. It’s a pathetic system that is overdone as is most anything the government produces.

  • smokey347

    my return will be more honest than the Clinton’s. let the IRS chew on that for awhile.

  • Jason

    Nonbusiness filers can capital gains / losses. Capital losses are limited to $1500 per year / $3000 if you are married and filing jointly. You can also claim losses for casualty, disaster, or theft.

    Buy a sweater for $100 and sell it for $1.50 at a garage sale – no you don’t get to claim the loss in value.
    Buy a sweater for $1.50 and turn around and sell it on Ebay for $10. Yes, you have to pay taxes on the $8.50 profit.

    • http://ecofrugality.blogspot.com/ Amy Livingston

      What if you made $8.50 on one sweater and lost $8.50 on another? Does the loss cancel out the profit?

  • LagunaLady27

    No. When I was married, my then husband tried to exaggerate our charitable donations. I refused to sign the return. He was not pleased. I wasn’t either. I didn’t know I had married a liar.

  • Georgia Wessling

    I would not cheat because of my faith. However, to keep things level, I only file on a short form tax sheet. I take no deductions, but could. I feel the lack of stress is worth any money I paid out to the government. My city and county personal and property taxes are very low, so I feel I have benefitted some from my taxes. I do have a funny story about filing taxes. The first year my husband farmed his own land, we bought a bull. I knew we could get a deduction, but not how much. So, I put the whole amount paid for the bull on our deductions. The next year we went to a lawyer who was a tax preparer. When I told him what I had done the year before, he informed me he didn’t want to hear about it. But, if we wanted, he could check our figures and do a correction with the IRS. He averaged out the loss over a couple of years or more. He actually got us money returned on that previous filing, using a lesser amount for the bull. All I can think is that he must have found a couple of other mistakes I made and corrected them too.

  • BellaTerra66

    I would never cheat on my taxes (altho’ every year I would certainly like to do so). I married a man who — I did not know at the time — had not filed taxes in 13 years. He embroiled me in a fight with The IRS for three years. You don’t want to mess with The IRS — they are like The Gestapo.

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