Taxes are a pain — both the annual ritual of figuring out what is owed to the IRS and the process of giving up the cash. It’s no surprise that carping about taxes is a national pastime.
Still, we don’t recommend cheating on your taxes to avoid paying them in full. Failing to pay the legally required amount can put you in hot water. The penalties for intentionally underpaying taxes are severe. In addition, the process of rectifying taxes with the IRS is painful.
Any income generated throughout the year is taxable, but some people do not comply with that rule. The means of cheating — for middle-class cheaters — is pretty mundane, as NOLO explains:
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.
While you may fly under the radar for the unreported $40 profit you made when you sold your snow blower at last year’s yard sale, other forms of unreported income can get you into trouble.
The IRS also might not appreciate your attempt to write off things such as:
- Commuting expenses to and from work
- Unqualified business expenses
- Legal fees
- Medical expenses for pets
The IRS is cracking down
The IRS has stepped up its efforts 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 to which you are not entitled.
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.
- Selecting an honest and experienced professional to prepare your tax return.
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.
If you are caught underpaying taxes — 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 might be tempting to cheat on your taxes to save money or get that large refund, it isn’t worth it.
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.