What is the Penalty for a False Deduction?

Tax deductions are a method of reducing taxable income. Deductions are most commonly utilized as a way to cite expenses, especially those related to how you were able to earn your income. Tax deductions are considered “tax incentives”, just like tax credits and exemptions.

What happens if you claim a false deduction and get busted by the IRS?

In this article, we will review the penalty for a false deduction and how to avoid it so you don’t get on the wrong side of the IRS.

Tax Deductions: Careful What You Wish For

Tax deductions, credits and exemptions are your best friends on a tax return. All three combine to lower your taxable income and help you save money.

Tax deductions are a privilege, but that doesn’t mean you should take advantage of them.

Yes, the IRS is indeed auditing fewer and fewer returns as the agency becomes increasingly overworked. For this reason, some people attempt to understate their profits, as well as claim several deductions and credits in order to avoid paying the IRS money at the end of the year.

The problem with abusing tax deductions and credits is it could come back to haunt you. If you become a target of the agency, there are severe fines and penalties associated with making false deductions.

Consequences of False Deductions

It is understandable that people make a mistake or two through the years filing taxes. But, the vast majority of these mistakes are genuine and not done deliberately.

The IRS, despite its ruthless reputation, is generally forgiving regarding honest mistakes. However, the same is not true for those miscalculations done on purpose.

In fact, the IRS has pretty intense penalties for those who deliberately evade taxes or disregard tax laws. The agency imposes a 20 percent increase on the amount owed if you are found to have made false deductions.

So, your current tax bill could go from $500 to $600 just for claiming a false deduction. That’s a $100 mistake, and the penalties are greater on higher tax bills.

Protect Yourself with Tax Deductions

Tax deductions are intended to help taxpayers when they qualify for the deduction. The keyword here is if they qualify. Too often, the taxpayer fails to read through all the qualifications on whether or not they are eligible, yet claim the deduction anyway.

It is important to back deductions up with proof even when you know you are qualified and claiming them correctly.

The IRS generally targets returns with deductions that exceed $5,000. If that is the case with you, it is vital that you provide a reason and any supporting evidence (documentation, receipts, etc.) in conjunction with the IRS Form 8275.

If the IRS disallows any deduction, you can still potentially avoid the 20 percent penalty if you failed to provide a reason and documentation the first time around, but have the evidence to back up the claim.

Avoid Tax Evasion – Serious Consequences

Claiming false deductions and dependents are things that are considered tax evasion under federal law. Any violation of federal law is a felony and will stay permanently on your record. It could also carry extremely serious criminal penalties.

It may seem like an honest mistake or a quick way to bypass the correct amount you owe in taxes, but in the end, it is not worth it. Knowingly claiming false deductions increases the potential for audit now and in the future, which could lead to other penalties and sanctions.

The good news is that honest mistakes are generally not penalized in the same manner as intentional tax evasion. In order for the IRS to consider it malicious fraud, the taxpayer must demonstrate willfulness and awareness that what he or she was doing was illegal.

Regardless, honest mistakes can still be considered negligence. People who make honest mistakes on their deductions may avoid criminal punishment, but they can still face penalties on taxes owed.

Tax Help You Can Depend On

The IRS considers it your responsibility to know the tax rules. Whether its tax evasion or negligence, the IRS will come after taxpayers who file for deductions incorrectly. 

Small business owners and self-employed individuals have it especially tough because they have a number of things to worry about, and with so many available deductions to claim, making an honest mistake is always a possibility.

Are you tired of dealing with the IRS on your own? Levy & Associates has represented honest taxpayers facing false deductions allegations from the IRS for years. We want to help you avoid paying 20 percent penalties to the federal government. Contact us today at 800-TAX-LEVY, or visit www.levytaxhelp.com to learn more about how we can help you. 

Contact Levy & Associates for Dependable Tax Audit Services

Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.

There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.

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