Jo Willetts, EA
Director, Tax Resources
Published on: January 19, 2021
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It is a federal crime to commit tax fraud and you can be fined substantial penalties and face jail time. Lying on your tax return means you committed tax fraud.
Potential consequences of lying on your tax return
The consequences of committing tax fraud vary from case to case. There are generally 5 different potential consequences, ranging in severity.
This notice is known as a CP2000. This notice is not a formal audit, but a notice that the IRS is proposing a change to your tax return.
Being audited means the IRS is trying to verify the information you included on your tax return. Audits are usually triggered by an anomaly on your tax return, which could just be a small mistake on your return. If you are honest when submitting your return, you may avoid or easily pass an audit. For more information, see our page on what might trigger an audit.
Depending on the situation, you could face civil penalties. These penalties and interest rates vary based on the severity of the situation. The bigger the fraud, the bigger the fine. A civil fraud penalty could be up to 75% of additional tax.
If you wrongfully claimed certain credits or deductions, you could be barred from using them again in future returns for up to 10 years.
In the rare, most extreme cases, the IRS may pursue civil or criminal felony charges for tax fraud. The IRS doesn’t prosecute many cases every year, but they do go after more severe tax fraud.
Penalties for claiming false deductions or dependents
Claiming false deductions or dependents is considered tax evasion and is therefore a felony. Claiming false deductions or dependents means filing for a deduction without actually meeting its requirements. When you claim a deduction, make sure you meet the requirements for that deduction.
Some of the most common falsely claimed deductions include child dependents, charitable donations, business deductions, and alimony deductions. Penalties for filing false deductions could include large penalties, disability to claim certain credits for 2 – 10 years, and jail depending on the case.
Willful acts of fraud vs. negligence
Willful acts of fraud are acts made with the intent to deceive the IRS, while negligence is a careless mistake. Tax laws are complex, and auditors are trained to spot intentional fraud, looking for things such as overstating deduction amounts, falsifying documents, or concealing income.
If the auditor does find intent, it may be considered fraud and you could be subject to any of the above-mentioned penalties. If the auditor determines that the discrepancy was due to negligence, you could still be fined but at a lower rate.
To avoid negligent tax fraud, make sure you have and provide proper documentation or proof of deductions you claimed and double-check all of your paperwork.
How to make sure you’re filing an accurate return
Always be honest on your tax returns. If you are doing your taxes yourself, be careful to ensure that all the information you provide is as accurate as possible. Keep and provide proof of deductions and follow instructions carefully. If you are unsure of how to file your taxes or want help, contact a tax professional.
About the Author
Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.