When you consider the amount of money you have to send to Uncle Sam every month, it might be tempting to forge figures and inflate your tax returns.
Intentionally lying on your tax return by reducing your income or inflating your tax refund can be classified as tax fraud. If you are caught, it comes with severe consequences. Here are what could happen should the IRS catch you lying:
Possibility of getting Audited
Bear in mind that the IRS also gets copies of W2s and 1099 that you get. As a result, they need no soothsayer to tell them if you do not report all your income. Even if you get payments that were not reported, there could be red flags from your financial activity that could lead to an audit.
Should there be an audit, the IRS will extensively review your taxes and financial information to make sure that everything tallies. While there is less than a 1% chance of getting audited, it is not worth the risk.
This is because an audit is time-consuming and costly. You have to submit documents and financial info from years back. There will be interviews as well. In the case of an audit, you are better off hiring a professional to represent you. This is good but costly.
Even if the IRS flags a single report for an audit, their review can go as far back as six years. Should there be any more issues, it will trigger more penalties for every year where there is an issue.
Possibility of Fines and Huge Penalties
You might be lucky to escape and audit. But should there be errors on your return, you could get slammed with fines and other penalties. As a result, playing with the numbers to reduce your tax bill or inflating your refunds will surely land you into trouble.
Underreporting your income will lead to huge penalties. It doesn't end here as there could be interest charged on the underpayments.
Although the media and movies have made us believe that tax evasion and fraud are a crime of the high and mighty, it also affects low and middle-income earners. Hence, in dishing out your penalty for tax fraud, your income amount does not matter; you can get a fine up to $250,000.
Possibility of Criminal Charges
In addition to the thousands of dollars you will accrue as interest, fees, and penalties, there is a possibility of facing the wrath of the law.
According to experts, tax fraud is a felony and can land you a prison sentence of up to five years. If you intentionally fail to report a financial account, you can get up to 10 years.
Should an IRS audit of your account or return trigger fraud, it will trigger criminal investigation and charges. Every year, 3000 U.S. citizens get convicted with court cases.
The good news, however, is that there is a low probability that Uncle Sam will charge you for fraud. Even if you face an investigation, there is a one in five chance that you will be charged. You, however, do not want to take the risk as the consequences are not worth it.
Possibility of Missing a Mortgage or Loan
On a final note, not reporting your entire income might affect your ability to buy a car or a house. This means that when you apply for a loan for a car or a mortgage, your return might indicate that you do not have the financial capacity to pay it back. This is another way in which lying hurts.
In reviewing your loan application, banks and mortgage companies do check copies of your tax return. This is to determine your total income. Lying about your real income on your tax return will not report your actual income. This will lead to loan denial, reducing your future financial capacity.
Accurately report your taxes
As much as we do not like Uncle Sam taking a share of our hard earned money, there is little we can do about it. Committing tax fraud, however, is not a route you want to take as it comes with severe consequences.
The cost of auditing, alongside the penalties, fines are all not worth the risk.
