Back in 2011, the IRS established a program requiring tax preparers to take competency tests and continuing education courses, but that program was recently struck down in court. So for now anyone can charge money to prepare taxes, which means it’s vital to ask about background, education and credentials. Check out our recent story on how to pick a tax pro.
3. Fuzzy math
If you haven’t done it, you’ve probably been tempted: inflating charitable contributions and other deductions to minimize taxes.
People cheat on taxes for lots of reasons, from believing taxes are unconstitutional to believing everybody does it. But before you head down this slippery slope, keep in mind some people eventually get caught.
Between October and December of last year, the IRS launched a criminal investigation of nearly 1,300 people. About 85% of these cases ended with somebody in prison, with sentences averaging four years.
Obviously, criminal cases involve things more serious than inflating a deduction or two. Most IRS actions involve audits, penalties and adjustments, not courtrooms and jail. Still, honesty is the simplest, and best, policy.
4. Offshore income
Some people reason that money the IRS doesn’t know about is money they don’t have to pay taxes on. So they try to hide it abroad by using foreign accounts and credit cards, wire transfers, international trusts, insurance plans and other vehicles.
This is considered tax evasion, and there’s a pertinent law whose acronym is suspiciously close to “FATCAT” — the Foreign Account Tax Compliance Act. Penalties for offshore tax schemes range up to an additional 75% of the original tax bill in civil cases. Criminal cases may result in fines up to $250,000 and five years in prison.
5. False forms
Some people claim credits they aren’t eligible for, either through ignorance, deceit or on the advice of an unscrupulous preparer.
One example from the IRS website: “One version of the scheme is based on the bogus theory that the federal government maintains secret accounts for its citizens and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.”
If you need help sorting out what tax forms apply to you, see if you can get some free tax advice instead of claiming something you don’t understand and risking trouble.
6. Frivolous arguments
Desperate taxpayers come up with the strangest deductions. Sometimes they get through — a stripper was once able to count breast implants as a business expense, according to this list of crazy tax deductions.
They’re funny to read, but often get rejected in court. There’s a whole section of the IRS website about failed frivolous tax arguments, including gems such as “taxes are voluntary” and “I don’t qualify as a ‘person.’”
It also has this bit on penalties: “Taxpayers who rely on frivolous arguments may also face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206(1), a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 3 years.” There the frivolity ends.
If you don’t cover your assets, you can only blame yourself — the IRS certainly will. If you need a hand, check out 4 Ways to Get Your Taxes Done Free.