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.
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.
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.
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:
- Accurately reporting all income, even if you are paid primarily in cash.
- Seeking free assistance with your return if needed.
- If you feel you must hire a professional to prepare your tax return, selecting one who’s honest and experienced.
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.