Many business owners who have mastered the steps necessary for accurate tax accounting actually look forward to tax time because they know they have filed accurately and are expecting large refunds. However, should you fail to report some of your income or claim greater deductions than are allowed by law, you may find yourself dreading tax time and even facing serious legal challenges.
Here’s a look at what to expect if you don’t make the right tax deductions—and what you should do to remedy the situation.
Financial Consequences of Making the Wrong Tax Deductions
The IRS has automated systems that review tax returns and they are becoming more and more efficient in identifying irregularities. As a result, they now generate the majority of IRS audits. Although most audits focus on the past three years, the IRS may go further back whenever fraud or major errors are suspected.
If the IRS determines that you filed a claim for a tax credit or refund that was filled with errors, you may be charged a penalty equal to one-fifth of the total of disallowed deductions. In addition, if the agency determines that your return was frivolous, meaning that you didn’t provide enough information to determine the proper tax owed, you could be forced to pay a $5,000 penalty. You may also have to pay a 75% penalty on top of the tax amount you owe if the government determines that you committed tax fraud in the process of underpaying on your return.
Legal Consequences of Making the Wrong Tax Deductions
If you’re not careful about choosing the correct tax deductions when filing a return for your business, for example, you may face a range of criminal charges in addition to the previously mentioned financial consequences.
For instance, you may be accused of tax evasion for willfully not filing a tax return, not providing financial information, or not paying taxes owed. Other possible charges include filing a fraudulent return and making false statements. Criminal prosecution may result in extra financial penalties as well as jail time.
Important Considerations Regarding Making the Wrong Tax Deductions
If you’re facing criminal charges because you failed to correctly file your tax returns, you may assume that saying “I didn’t know” is a sufficient defense. In some cases, claiming ignorance of wrong-doing can spare you legal consequences in some instances. In general, though you will likely have to pay back taxes and interest, the government is unlikely to fine or prosecute you for one mistake. However, repeated failures to pay or accurately report your income may lead authorities to take action.
If you face prosecution, you will be expected to prove that your returns are accurate or that any errors made are you made were innocent mistakes.
Obtain Tax Relief Help From a Legal Expert Today
Receiving a notification from the IRS informing you that your return is under audit is always stressful. Fortunately, though, you can tackle this notice head-on with the help of a tax law firm that is experienced in working with the federal government to resolve tax disputes.
An effective, reputable law firm will research your particular tax problem, no matter how complex, and aid in achieving a favorable outcome. For instance, you may be granted a penalty abatement to reduce or remove your penalties and interest on tax debt by showing that you did not comply with the IRS due to financial hardship.
Consider the above-mentioned consequences of not choosing the right tax deductions, and take control of the situation with confidence with expert legal guidance today.
Katie Tejada is a writer, editor, and former HR professional. She writes about the latest developments in HR, business communication, recruiting, and CRM solutions. She also writes about the latest developments in socially responsible (and irresponsible) tax laws.