You'd be hard-pressed to find someone willing to argue against the idea that taxes are complicated. There's a reason why most people dread it on some level every time April rolls around. Making mistakes is commonplace, but it's also critical to understand that not all issues are created equally.
In fact, some common tax mistakes are more than just a "small problem." They could land you in trouble with the IRS if you're not careful, which is why they should be avoided at all costs.
What is Tax Fraud? Breaking Things Down
As the term implies, tax fraud is a deception "deliberately practiced" when filing your state or federal income taxes. In other words, making a mistake that ends up saving you money or putting you in an otherwise beneficial situation is one thing. Withholding information or filling out forms incorrectly and knowingly to get those same benefits are entirely different.
What happens if you commit tax fraud will vary depending on the severity of the situation. Generally, you could get a penalty of up to 75% of the amount you failed to pay due to the fraud in question. Likewise, you could get fined up to $100,000 and be subject to three years in federal prison.
Improper Child Tax Credit Claims
The Child Tax Credit is a tax break for families with qualifying children. That money can be essential for food, clothes, housing, and other vital items. "Qualifying" is the operative word in that sentence - if your family situation doesn't meet the criteria, you cannot claim the Child Tax Credit, and if you have done so, it is in error—end of story.
Failing to Report All of Your Income
This issue has become increasingly common over the last few years as the "gig economy" grew popular. Someone might fully report all the income they bring in from their traditional 9-to-5 job... but may have needed to be more forthcoming about all that money they were making ride-sharing on the weekends. Or, they could set up an eBay store that generates a substantial amount of income that they don't have to report because no formal 1099 had been issued in the past.
Improperly Claiming Tax Deductions
One common example of improperly claiming tax deductions would be the home office deduction. Some people might mismeasure their home office on accident, arriving at a larger surface area in a way that ultimately makes the room seem bigger than it is. This would make the deductions you're entitled to more significant as well.
But if you say that you have an office used exclusively for business in your home and you just flat out don't, that's an intentional deception, which would fall under the description of tax fraud.
Incorrectly Claiming the Earned Income Tax Credit
Similar in concept to the Child Tax Credit, the Earned Income Tax Credit is designed to help provide people with the extra income they need for essential purchases. In 2023 (meaning for the taxes that you will file in 2024), the credit will vary between $600 and $7,430, depending on the filing status you select and the number of children you have.
This is another one of those tax credits where the IRS is very clear about who qualifies, who doesn't, and what amounts people are entitled to. If you have one qualifying child, for example, the maximum amount of the credit is $3,995. This is with a maximum adjusted gross income (both for single and head-of-household filers) of $46,560. If you don't fall into the rigidly defined brackets regarding who can claim the credit and who can't, you shouldn't do so, or you run the risk of tax fraud.
Failing to Report Crypto Income
Especially over the last few years, people who fail to report cryptocurrency income on their taxes have become a significant issue. There has been a lot of talk about whether this "virtual currency" qualifies as income. The IRS has decided it does, which means it is - whether you like it or not.
If you don't report transactions on your income taxes and you get hit with an IRS audit, not only will you have to pay interest on the money you owe. In extreme cases, you will probably have to deal with penalties and potentially even criminal charges.
Cryptocurrency can be very volatile, which is why if you want to ensure that everything is being filed correctly with the IRS, you should not hesitate to enlist a professional's help. Getting help from a pro with your taxes can help you avoid these situations moving forward.
To learn more about all common tax mistakes that can get you in trouble with the IRS or to speak to someone about your needs in more detail, please don't delay - contact us today.