7 Deadly Tax Sins
When it comes to the IRS, some bad acts are worse than others. We have compiled below the top ones to avoid at all costs. However, if you should find yourself in the middle of one, you should certainly call tax attorneys to get you out of the bad situation (yes, it is a bad situation).
- Not Filing Returns – The folly of this practice cannot be overstated. For starters, not filing returns is a per se felony under the tax laws. Many prominent celebrities have been prosecuted for failing to file their returns. Also, many protections taxpayers will have under law, such as statute of limitations, etc. do not kick in until the taxpayer has actually filed the tax returns. Additionally, the penalties imposed for not paying tax due is significantly less than the one imposed for failing to file. A word to the wise – non-filing is a major no-no.
- Failing to Report Foreign Accounts – In the last several years, the IRS has vigorously pursued those with unreported foreign accounts. Anyone with foreign accounts with a balance more than $10,000 (at any time of the year, including intraday) must file an informational return – the FBAR – with the IRS. Failure to comply with this is prosecutable, with penalties up to significant jail terms.
- Claiming Tax Breaks You’re Not Entitled To – The tax code has tax breaks for many categories of taxpayers, but only if you meet the requirements. Tax credits such as the earned income tax credits (EITC) are popular with taxpayers but are among those that get taxpayers and tax preparers alike in hot waters. A recent government report found that 22% to 26% of EITC payments were issued improperly, totaling $13.3 to $15.6 billion. With a new Republican administration, and a Republican Congress eyeing a tax overhaul, expect enforcement to take center stage once again.
- Failing to Report Income – Intentional omissions of income can result in stiff penalties, up to and including criminal prosecutions. Many payments made to taxpayers are reported to the IRS on Form 1099 or other reports. Failure to reports the corresponding income on the returns will unfailingly draw the IRS’ attention. Also, the IRS has more time to audit a return that omits more than 25% of its gross income – six years, instead of the usual three years.
- Faking Deductions – Some tax items most likely to draw audit attention (and penalties) include the Schedule A deductions. These include deductions for charitable donations, medical expenses, real estate taxes and mortgage interests. While a taxpayer may indeed be entitled to these deductions, one should stay away from claiming them unless you have documentations to back up the claims.
- Incongruent Reporting – This becomes the case when you are reporting information that was also reported on other tax forms such as Form W2, Form 1099 or Form K-1. Copies of these reports are sent to the IRS and the IRS will be looking for correlation on the information reported on your returns. Any variance in the reporting will likely flag your return and draw IRS’ unwanted attention.
- Foregoing Deductions – Perhaps the one rule worse than faking deductions is failing to take deductions that you may be entitled to. The tax code provides for a lot of credits and deductions which can net a taxpayer thousands of dollars, provided the taxpayer can substantiate the deductions or credit claims. If you’re legally entitled to a deduction or credit, take it!
