Lying on income taxes means you’re committing tax fraud, which is a federal crime. The IRS has severe penalties in place, so perpetrators may pay a heavy price. Prison is a possibility, although most tax cheats aren’t going to spend time behind bars. If a person simply can’t afford to pay taxes, the IRS probably won’t pursue the matter in court. However, those who conceal assets, don’t report income, or take credits or deductions for which they aren’t entitled can expect the IRS to take serious action.
Depending upon the specifics of your situation, you may face a variety of criminal penalties if you are caught lying about your income to the IRS. Heavy fines and jail time are both possibilities for offenders.
IRS Audit Triggers
If you have been caught lying on your income tax form, that’s likely because the IRS subjected your income taxes to an audit. Less than 1 percent of individual tax forms are audited annually. However, there are certain red flags that may trigger an audit. These include:
- High earners – those making $200,000 a year experience a higher audit rate
- Extensive business deductions
- Alimony deductions
- Deductions disproportionate to income
- Foreign accounts
- Large entertainment and business meal deductions
- Non-cash charitable contributions
- Any unreported investment income
- Business losses reported on Schedule C
- Rental losses
- Losses taken for what are essentially hobbies, not businesses
- 100 percent vehicle business use
- Early retirement account withdrawals
- Home office deduction claims
- Large currency transactions
Tax laws are complicated, and many errors are an honest mistake on the part of taxpayers, or even their accountants. However, the IRS is very efficient at rooting out the dishonest from those who didn’t know better. The IRS looks for specific information during an audit. Certain activities have higher levels of fraud. These include:
- Side income – many people whose employers report their income to the IRS also have side jobs, and it’s their responsibility to report this income. The IRS will receive a Form 1099-MISC from a vendor the person worked for, or it receives a Form 1099-INT from a financial institution the person didn’t include on his income tax form.
- Self-employment – any self-employed person, especially someone in a cash-heavy business, will receive extra scrutiny from the IRS.
IRS Audit Penalties
Attempting to “evade or defeat” tax is a felony, as is the willful failure to collect or pay tax. If found guilty, a person is subject to up to five year’s imprisonment and a fine of up to $250,000 for an individual, along with prosecution fees. Fraud and making false statements on a tax return is also a felony, and a guilty party may end up in prison for up to three years and fined up to $250,000, again with prosecution fees involved. The same holds true for anyone who assists another in fraud and making false tax return statements.
“Willful failure” to file a return, pay tax or supply information is a misdemeanor, with a guilty party subject to up to one year in prison and a fine of up to $100,000 and the cost of prosecution.
Along with these penalties, those who did not pay tax must pay their back taxes plus a 75 percent fraud penalty.
I Lied on My Taxes and Got Caught
Honesty truly is the best policy. Anyone accused of major fraud should hire a tax attorney, but those who are on the hook for less should comply and pay the penalties. It’s a different story if you were honest and have the paperwork to prove it, but never compound being caught in a lie by lying even more.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.