Tempted to boost your tax refund by adding a few extra deductions or claiming some additional business expenses? Be careful. Padding deductions is another one of the IRS Dirty Dozen. Most taxpayers file honestly each year. However, there are also taxpayers that overstate deductions or claim credits such as the Earned Income Tax Credit (EITC) or Child Tax Credit when they are not entitled to do so. This is not to say that you should not take legitimate deductions. If you made large charitable contributions, then you should claim them.
The penalties for filing incorrect returns can be significant. They can include:
- 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
- $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
- In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.
It is also possible to face criminal charges for filing a fraudulent return. This could mean additional penalties and even a time in prison.
What can you do to make sure you file an accurate return? Begin with your documents. If you have legitimate deductions, by all means take them. If you have business expenses, you should claim them. If you have any doubt about what is permissible, contact a tax professional such as a CPA, Enrolled Agent, or a tax attorney. The IRS also has plenty of information available on its website.