Filing your income taxes accurately is required by law. Though the Internal Revenue Service cannot audit every return, if you are caught cheating, the penalties are substantial. You will have to pay the additional taxes owed and depending on the severity of the lying on your return, you can also face additional penalties or even jail time.
Penalties for Negligence
If you negligently under-report the amount of your tax liability on your income tax return, the IRS imposes a penalty equal to 20 percent of the portion of the underpayment. For example, if you report your tax liability to be $50,000 when it is really $60,000, the IRS imposes a penalty of 20 percent on the $10,000 underpayment, or $2,000. This penalty applies to negligence or disregard of the tax laws, substantial understatements and transactions lacking economic substance. According to the tax code, "negligence" includes carelessness, recklessness or intentional disregard of tax laws. A substantial understatement refers to an understatement that exceeds the larger of 10 percent of the tax required to be reported or $5,000.
When the underpayment is due to fraud, the IRS imposes a penalty equal to 75 percent of the underpayment. For example, if you fraudulently report your tax liability to be $50,000 when it is really $60,000, the IRS imposes a penalty of 75 percent on the $10,000 underpayment, or $7,500. The penalties for negligence do not apply on top of the fraud penalties. In addition to the tax penalties, any person who willfully attempts to evade taxes is guilty of a felony. If convicted, you would face up to $250,000 in additional fines or up to 5 years in prison, as well as the cost of the prosecution. Tax evasion is defined as "any person who willfully attempts in any manner to evade or defeat any tax." If you are convicted of tax fraud, you can also face a $250,000 fine and up to three years in prison. Tax fraud is defined as someone who "willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter."
When a higher tax liability is imposed, the IRS charges interest on the unpaid amount of tax from the date the tax should have been due. When penalties are also imposed, the interest on the penalties begins accruing if the penalties are not paid within 21 calendar days from the date the penalties are imposed. If the amount is $100,000 or greater, the payment is due within 10 business days or the interest begins to accrue from the date of notice. If the penalty is paid within the time limit, no interest accrues on the penalties.
Penalties for Tax Preparers
The taxpayer is not the only one who can get in trouble for a false return. If a tax preparer prepares any return and knew or should have known a position was unreasonable, the tax preparer must pay a penalty equal to $1,000 or 50 percent of the decrease in tax liability obtained by the taxpayer as a result of the return. For example, if the tax preparer prepares a return excluding income that would increase the taxpayer's liability by $25,000, and the tax preparer knows or should have known that the position was unreasonable, the tax preparer would owe $12,500 in penalties for the return. This penalty is separate from any penalties owed by the taxpayer. Tax preparers can also be found guilty of a felony for aiding in tax fraud. If the taxpayer willfully aids or assists a taxpayer in a false claim, the tax preparer can be fined up to $250,000, imprisoned for up to three years, and charged with the costs of prosecution.
- Interal Revenue Code: Sections 6601, 6662, 6663, 6694, 7201, 7206
- Internal Revenue Service: Related Statutes and Penalties - General Fraud
- Photodisc/Photodisc/Getty Images