Tax Stunts That Ought To Be Avoided
Every year, some disgruntled taxpayers try to dodge their IRS obligations using shady and questionable loopholes. These dubious shortcuts always sound clever, but, it’s important to realize that most of these tax stunts don’t work at all. Worse yet, they are actually illegal and will land you in serious hot water if you ever get caught.
Below are several such stunts to avoid this April:
Disguising Personal Expenses As Business Expenses
The IRS permits individuals to deduct “ordinary and necessary” business expenses from their income taxes:
“An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
It’s up to you to calculate and list these expenses on your return. Since the IRS does not usually verify each and every business expense you list, it’s tempting to list personal expenses (or make expenses up out of thin air) in order to pad your write-offs. Though this might seem smart, you will be completely defenseless if you get audited and need to prove the deductions you claimed were ordinary and necessary.
Backdating Checks For Write-off Purposes
Business owners often find themselves short of cash at the end of the year, just as a huge tax bill is about to come due. Some of them react by “back-dating” checks to suppliers or business partners so as to pad their deductible expenses. In other words: a company that pays for consulting might write out $5,000 worth of checks to them today, but use a date from December. This way, the check appears to be an expense from the previous tax year that they can deduct right now.
Again: there’s no guarantee that you’ll get caught for doing this, but it is illegal and will be something you need to substantiate if audited.
Understating Your Taxable Income
Think of them what you wish, but the IRS is not stupid. They have entire teams of analysts who study tax fraud, looking to uncover patterns and common avoidance schemes. Here’s one of their findings: most tax fraud does not come from blatant non-filers. Instead, it actually comes from people who do file, but understate their income.
This might seem illogical at first. After all, submitting a return should make you look more compliant and less risky. And it does – to an extent. But the IRS is aware that tax cheats think this way and thus makes a point of investigating suspicious returns. That’s why reporting less than you factually earned can be a dangerous stunt to pull.
Overstating Your Business Losses
A corollary to understating your income is overstating your losses. The same principle applies, however. Though it might go un-addressed for a few years (or even forever) the threat of an audit is always hanging over you. Knowingly understating your income is a form of tax fraud. In addition to interest and late payment fees, you could be criminally liable.
Don’t go down that road. Instead, swallow the horse pill and tell the truth about your tax obligation. Paying it wont be enjoyable, but neither will a prison sentence from the tax courts.
Claiming Tax Credits You Don’t Qualify For
Seemingly every year, new tax credits are signed into law. Whether it’s for alternative energy, retirement, or education, they all offer opportunities for qualified taxpayers to lower their IRS bills in connection with certain activities. Yet again, though, there’s a temptation for people who don’t qualify to claim these credits – for example, someone who made no changes to their electrical system might claim a “clean energy” credit for their homes and try to get away with it.
What they don’t realize is that these fraudulently claimed credits will be reversed if you get caught. You’ll not only owe the amount of the credit, but also interest, late fees and other penalties.
Not Filing At All
Not filing often feels like a safe maneuver – a way to buy a taxpayer time or prolong punishment for not paying. The IRS is perpetually backlogged, meaning they likely wont find out for years. In time, you might even forget about the return you didn’t file. But the IRS will not forget! No matter how far behind they are today, their computers are diligently working through the backlog.
That means it’s not a matter of if you’re detected, but when. Somewhere down the road – maybe two years from now, maybe as many as five – you will be contacted by the IRS about your un-filed return. By that time, you will also owe the maximum in interest and late payment fees. If you have specific tax questions, there are options available to you.