The average tax refund is more than $3,000. When you hear that number and do your taxes, only to find out that your refund is much less — or worse, that you owe money — it can be tempting to fudge the numbers and increase your refund.
But misrepresenting your income on your return counts as tax fraud, and has serious consequences. Below, find out what happens if you lie on your taxes and what IRS penalties you could face.
1. You Can Get Audited
Because the IRS gets all of the 1099s and W-2s you receive, they know if you do not report all of your income. Even if you accept unreported payments in cash or check, your financial activity can reveal red flags about what income you do not report, potentially triggering an audit.
An IRS audit is an extensive review of your taxes and financial records to ensure you reported everything accurately. Though most people have a less than 1% chance of being audited, it’s not worth the risk.
Undergoing an audit is a time-intensive and costly process that involves providing years of documentation and even in-person interviews. If the IRS audits you, you can (and probably should) hire a professional to represent you and your interests. While that’s a smart idea, it can be a pricey, unexpected cost.
While the IRS may have only flagged one return for audit, they can review any return from the past six years. If they find more issues, they can add penalties and fines for every year they find problems. If you made tax mistakes for the past several years, you could end up owing thousands for taxes you misrepresented.
2. Tax Fraud Carries Heavy Penalties & Fees
If the IRS does select you for audit and they find errors, the penalties and fines can be steep.
According to Joshua Zimmelman, president of Westwood Tax and Consulting, fudging your taxes to reduce your tax bill or boost your refund can cost you more in the long run.
“If you don’t pay your tax liability by the due date, the IRS will charge you a late payment penalty. Even if you file on time, you may still be charged a late payment penalty if you under report your income and the IRS finds out,” Zimmelman said.
And the penalty is just the start. The IRS can also charge you interest on the underpayment as well. “If you’re found guilty of tax evasion or tax fraud, you might end up having to pay serious fines,” said Zimmelman.
While tax evasion or tax fraud is normally imagined as something that affects high earners and big executives, even those with lower incomes need to be careful. When describing the penalties for tax fraud, the IRS does not differentiate between income amounts or how much you underpaid your taxes. If you falsify any information on a return, they can fine you up to $250,000.
3. Criminal Charges Are Possible
Besides potentially owing thousands in IRS penalties, fees, and interest, you could also face criminal charges.
“Tax fraud is a felony and punishable by up to five years in prison,” said Zimmelman. “Failing to report foreign bank and financial accounts might result in up to 10 years in prison.”
Criminal investigations and charges start when an IRS auditor detects possible fraud during their audit of your returns. Courts convict approximately 3,000 people every year of tax fraud, signaling how serious the IRS takes lying on your taxes.
The odds of the IRS charging you for fraud is relatively small — if you’re investigated, the chances are less than 20 percent that you’ll face a criminal charge — but the potential consequences are severe. It’s not worth the risk to get a little extra money in your refund.
4. You May Miss Out on a Mortgage or Loan
Finally, not reporting all of your income can have serious ramifications when it comes to buying a car or a home.
“If you under-report your income, it might hurt you when you try to buy a house or apply for a personal loan,” said Zimmelman. “You might not get it if it looks like you cannot afford to pay it back, so lying on your taxes may hurt in that respect.”
When mortgage companies and banks review your application, they request copies of your tax returns to check your total income. If you lied about your income to lower your tax liability, your full income won’t be on the return. That means you may be denied for the loan you need, hurting your financial future.
Accurately Report Your Taxes
No one likes owing money at tax time or missing out on a big refund. But tax fraud is a serious criminal action, and glossing over your income or boosting your deductions counts as lying to the IRS.
Saving yourself a little money at filing time can end up costing you thousands of dollars with auditing, penalties, and fines. Save yourself the trouble and report your information accurately.
For more information on filing your taxes, avoid these six common mistakes millennials make on their taxes.
Image: Jacob Ammentorp Lund