Tax fraud costs the U.S. government millions of dollars each year. But, contrary to what you might think, tax fraud isn’t committed solely by identity thieves or other bad actors. Many people unwittingly commit fraud simply by not paying careful attention to the details of their tax return.
To help ensure you don’t make mistakes on your taxes that could constitute fraud, we’ve compiled a list of common ways people commit tax fraud without realizing it. Read on to learn what tax fraud is and 8 ways you may be accidentally committing tax fraud.
What Is Tax Fraud?
Tax fraud happens when someone (an individual or a business) intentionally falsifies or omits information on their tax return in an effort to reduce the amount they owe or get a bigger return. Essentially, committing tax fraud is cheating on your taxes.
Tax fraud is different from tax avoidance. Tax avoidance doesn’t involve falsifying information — it simply involves using deductions and loopholes to legally reduce your tax liability.
The key word when it comes to tax fraud is “intentional”. Given the complexity of the U.S. tax code, mistakes can and do happen. But while errors on your tax return that are simply negligent — not intentional — generally aren’t considered fraud, they can still subject you to penalties.
9 Ways You May Be Accidentally Committing Tax Fraud
There are several ways that you could be accidentally committing tax fraud. Here are 8 of the most common.
1.) Filing Your Return With Missing or Incorrect Information
It’s crucial to ensure your return is filled out completely and accurately before you file. Forgetting to include additional forms needed to report certain tax credits is a common mistake, as is leaving off important information like Social Security numbers or other personal details.
2.) Failing To Report All of Your Income
Deliberately failing to include all of your taxable income on your return is considered fraud. If you make tips in your job or have other cash income not reported on a W-2, it can be easy to forget to include it on your taxes. It can also be easy to forget to report 1099 income…but it’s vital that you do. Failing to report all of your taxable income to the IRS could be considered negligent, or worse — tax fraud.
3.) Claiming Credits You Don’t Qualify For
Credits, when used properly, help reduce the amount of tax you owe. But make sure you actually qualify for a credit before you claim it on your tax return.
One example of this is the Earned Income Credit. To qualify for this credit, you have to meet certain income requirements. Your eligibility for this and other credits can fluctuate from year to year, so it’s important to double check the requirements before claiming them.
4.) Misusing Tax SheltersTax shelters, such as retirement accounts and investments, when used appropriately, are perfectly legal. But abusing these shelters by redirecting your money specifically to avoid paying taxes can constitute tax evasion (a form of tax fraud) and subject you to penalties.
5.) Claiming Improper or Inflated Deductions
When deducting business expenses, make sure each expense is truly a necessary business expense before including it on your return. And be careful not to inflate (or make up) business expenses. Never include personal expenses, and only include business expenses that are truly deductible according to the tax code. Consult the IRS website or your tax professional if you are unsure.
6.) Improperly Reporting Charitable Contributions
Similarly, make sure that if you deduct charitable contributions, that you keep good records of them and report only those donations that the tax code allows. Reporting a full donation when you received something of value in return (tickets, merchandise, and so on), reporting donations to non-qualified organizations, or not maintaining proper records of your giving can all expose you to potential problems with your tax return.
7.) Improperly Claiming Dependents
To claim a child as a dependent, they must:
- Be related to you
- Live in the same home as you for more than half the tax year
- Meet age requirements
- Not be included on a joint return with someone else
Incorrectly claiming a child as a dependent who doesn’t meet these requirements can constitute tax fraud.
8.) Fraud Committed By Your Tax Preparer
Unfortunately, not all tax preparers are reputable. And even more unfortunately, if your tax preparer commits fraud on your tax return, you are responsible for it. This is why it’s vital to: a) ensure you hire a reputable tax preparer, b) always oversee the work they do for you, and c) make sure you know what is on your tax return before it is filed.
9.) Not Filing a Tax Return at All
U.S. taxpayers are legally bound to file a tax return every year. Deliberately failing to do so constitutes tax fraud because you are withholding information from the IRS and failing to properly pay your taxes.
Potential Penalties and Fixing Errors On Your Tax Return
If you do mistakenly make any of these (or other) errors, you may be subject to penalties. View the list of potential penalties here. However, if you realize you made a mistake on your tax return that could constitute fraud or subject you to a penalty, you can amend your return using Form 1040-X, the Amended U.S. Individual Income Tax Return.
Working with a reputable tax preparer or using tax preparation software can help prevent many of these mistakes and protect you from accidentally committing tax fraud.
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