8 Ways You Might Be Cheating on Your Taxes

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Whether we’re pointing out frequently overlooked tax breaks, explaining how retirement income is taxed or helping you set up your tax withholding, we want you to trim as much off your tax bill as legally possible. But note the word legally.

Yes, we want you to beat the IRS and save on taxes, but only by following the tax code’s rules. Save where you can, but pay what you legitimately owe.

Sometimes, though, taxpayers don’t always stay within the bounds of the law when filling out their tax returns. Of course, there are out-and-out fraudsters who purposely avoid paying the IRS what they owe under the law.

However, in most cases, people who don’t pay all the taxes they legally owe do so unintentionally. Both the tax code and IRS forms are complicated, so it’s easy to make an honest mistake if you’re not careful. This article will provide more explanation to the topic of taxes.

What is Considered Cheating on Your Taxes?
How do You Lie on Your Taxes and Get Away With it?
What Can You Write Off on Taxes?
What Happens if You Lie on Your Tax Return?
Can You go to Jail For Cheating on Your Taxes?
Does the IRS Check Your Dependents?
Can I Claim my Internet Bill on my Taxes?
Does the IRS Actually Look at Every Tax Return?
Can I Fake a W2?
Can You Anonymously Report IRS?
Do You Get a Bigger Tax Refund if You Make Less Money?

What is Considered Cheating on Your Taxes?

The term “tax cheat” refers to an individual or group who fails to pay the tax required of them by law. Depending on the usage, the term may also refer to individuals who use aggressive tax avoidance strategies despite technically following the letter of the law.

Governments rely on tax revenues to pay for expenses such as healthcare, policing, public education, traffic infrastructure, and the military. For many taxpayers, however, taxes represent a major expense, creating a strong incentive to reduce one’s tax liability whenever possible.

Read Also: Tax Credit for College Students

While some programs allow taxpayers to reduce their taxes legally—for example, via contributing money into an employer-sponsored retirement plan such as a 401(k), other allowed deductions, or legitimate tax shelters—some people also use dodgy tax shelters and other illegal means in order to avoid paying taxes.

Any individual that employs the use of strategies to avoid paying taxes or paying fewer taxes than they should in an illegal way (or in a legal way that is considered unethical) is considered a tax cheat.

For example, whether purposely or by accident, a person might work on a cash-only basis and refrain from declaring all or some of their income when they file their taxes each year.

If their employer did not keep accurate records of these cash payments, it may be impossible for the IRS to track these transactions. For example, if a worker was paid $500 a week but only reported that they were paid $250 a week, they would pay fewer taxes by providing this false information, making them a tax cheat.

Nevertheless, the failure to disclose the cash income would technically be an example of tax fraud, potentially making the tax cheat vulnerable to fines or other penalties were the individual caught.

Other examples of how tax cheating can occur include overstating the value of charitable donations in order to enjoy an inflated income tax deduction, paying employees “under the table” without proper payroll tax deductions, and failing to report gambling winnings or other windfall sums.

How do You Lie on Your Taxes and Get Away With it?

Here are the areas where filers have admitted to being less than honest with the IRS, according to Credit Karma Tax.

1. Failure to report income

Maybe you have a part-time job and you work on a cash-only basis. Perhaps you’re earning money from illicit activity. The IRS still wants to know about your earnings.

Report your nontraditional sources of income on line 21 of your 1040. That includes money from, er, activities the Justice Department might frown upon. If you are your own boss, you still need to report your income on Schedule C and pay self-employment taxes.

2. Phony deductions and credits

Seven percent of the admitted tax cheats said they fibbed about their number of dependents, their itemized deductions or their tax credits.

“One of the most common deductions people take advantage of is the charitable contribution,” said Chen. “People drop their items off at Goodwill, get an empty slip and they have to report the fair market value of what they gave. It’s an opportunity to write what you want.”

Don’t overvalue your used goods. TurboTax has a tool to obtain the value of a donated item, while Goodwill and the Salvation Army offer guides.

3. Skipping tips and gifts received

If you’re getting tips at work, the IRS wants to know — and wants its cut.

Employees must report their tip income on Form 4070. Meanwhile, employers must collect income taxes, plus Social Security and Medicare taxes, from this income.

4. Paying others off the books

If you’re paying your nanny or housekeeper in cash under the table, then congratulations: You’re an employer. Do yourself a favor and make your arrangement official.

Individuals you pay off the books may be considered employees: This means they will need to report what they make as taxable income, and you’ll need to cover a portion of Social Security and Medicare taxes as an employer.

If you paid at least $2,000 in annual wages to a household employee and withheld payroll taxes, be sure to file Schedule H when you do your taxes.

5. Hiding your gambling winnings

If you won big at the casino, be sure to let Uncle Sam know. All of your winnings must be reported as “other income” on line 21 of your 1040.

Don’t try to hide your money: The entity paying you is required to send you a Form W-2G — and must tell the IRS about your windfall.

What Can You Write Off on Taxes?

Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn’t overlook.

1. Sales taxes

You have the option of deducting sales taxes or state income taxes off your federal income tax. In a state that doesn’t have its own income tax, this can be a big money saver. Even if you paid state taxes, the sales tax break might be a better deal if you made a big purchase like an engagement ring or a car.

You have to itemize to take the deduction rather than take the standard deduction. TurboTax helps to determine whether itemizing or taking the standard deduction is best for you based on your entries and, if you itemize, whether you should take the sales tax deduction or deduct state income taxes.

2. Health insurance premiums

Medical expenses can blow any budget, and the IRS is sympathetic to the cost of insurance premiums—at least in some cases. Deductible medical expenses have to exceed 7.5% of your adjusted gross income (AGI) to be claimed as an itemized deduction for 2020.

However, if you’re self-employed and responsible for your own health insurance coverage, you might be able to deduct 100% of your premium cost. That gets taken off your adjusted gross income rather than as an itemized deduction.

3. Tax savings for teacher

It’s the rare teacher who doesn’t have to reach into her own pocket every now and then to purchase items needed for the classroom. While it may sometimes seem like nobody appreciates that largesse, the IRS does. It allows qualified K-12 educators to deduct up to $250 for materials. That gets subtracted from your income, so you can take advantage of it even if you don’t itemize.

4. Charitable gifts

Most taxpayers know they can deduct money or goods given to charitable organizations—but are you making the most of this benefit? Out-of-pocket expenses for charitable work also qualify.

For example, if you make cupcakes for a charity fundraiser, you can deduct the cost of the ingredients you used to bake them. It helps to save the receipts or itemize the costs in case of an audit.

5. Paying the babysitter

You might be able to deduct the cost of a babysitter if you’re paying her to watch the kids while you are working, looking for work, or a full-time student. You will need to report the name, and tax ID number of the person or organization providing the care as well as the address of where the care was provided.

Some states also require that you report the telephone number of the care provider. While this is technically not a deduction, it can be even better because you don’t have to itemize your deductions to receive the credit. This means that it can lower your tax in addition to taking the standard deduction rather than itemizing.

6. Lifetime learning

The tax code offers a number of deductions geared toward college students, but that doesn’t mean those who have already graduated don’t get a tax break as well. The Lifetime Learning credit can provide up to $2,000 per year, taking off 20% of the first $10,000 you spend for education after high school in an effort to increase your education. This phases out at higher income levels but doesn’t discriminate based on age.

7. Unusual business expenses

If something is used to benefit your business and you can document the reasons for it, you generally can deduct it off your business income.

A junkyard owner, for example, might be able to deduct the cost of cat food that encourages stray cats to hang around and keep the mice and rats away. A bodybuilder got approved to deduct the body oil he used in competition.

8. Looking for work

Losing your job can be traumatic, and the cost of finding a new one can be high. But, for tax years prior to 2018, if you’re looking for a job in the same field, you itemize your deductions, and these expenses exceed 2% of your adjusted gross income, any qualifying expenses over that threshold can be deducted.

It may seem like a high bar, but those costs add up quickly—consider deducting the mileage you put on your car driving to interviews and the cost of printing resumes. Beginning in 2018, these expenses are no longer deductible for federal tax but some states, such as California, still allow this deduction after 2018.

9. Self-employed Social Security

The bad news about being self-employed: You have to pay 15.3% of your income for social security and medicare taxes, the portions ordinarily paid by both employee and employer. But there’s one small consolation—you do get to deduct the 7.65% employer portion off your income taxes.

What Happens if You Lie on Your Tax Return?

Other than a guilty conscience, what can happen if you lie on your tax return to get a bigger refund or owe less? The consequences fall into six categories.

1. The IRS can identify discrepancies on your return and send you a notice.

This is the simplest and normally mildest IRS response.

As the IRS processes your return, the IRS will automatically check for mismatches between your return and information the IRS has on file about you. The IRS gets this information every year from your employers, banks, and other third parties.

The IRS will flag any mismatches and may send you a “CP2000 notice” proposing more taxes.

2. The IRS can audit you.

The IRS has a formula for picking out returns to audit.

The IRS is more likely to audit certain types of tax returns – and people who lie on their returns can create mismatches or leave other clues that could result in an audit.

Audits can be costly and long. Individual taxpayers owe, on average, $9,500 in additional taxes (not including penalties and interest) in an audit. And complicated audits can last more than a year.

Audits can also lead to other consequences, especially if the IRS thinks you intentionally lied on your return. Those can include civil penalties of up to 75% of the taxes you owe.

3. You can lose tax credits in future years.

If the IRS audits your return and determines that you incorrectly claimed the Earned Income Credit (EIC), two things can happen:

You’ll have to pay back the EIC portion of your refund.
You may not be able to claim the EIC for two years – and maybe even 10 years if the IRS thinks you fraudulently took the credit.

4. You’ll be paying for professional help.

Any time you’re dealing with an IRS audit, penalties, or other significant tax problems, you’re probably going to need the services of a qualified professional.

While this is often money well-spent and can lessen some of the other consequences, the fees can add up for more complicated issues. Be sure to use a reputable professional. For civil (non-criminal) matters, you normally won’t need an attorney.

In most cases, an enrolled agent or CPA familiar with tax problem-solving can handle the situation, saving you time, money, and stress in the long run.

5. You could face civil penalties.

Penalties will vary based on how much your understated your tax. If you made a simple error and the IRS adjusted it, you might not have to pay any penalty.

Bigger understatements mean bigger consequences. In this case, the most common penalties are:

Negligence penalty: 20% of the additional tax
Fraud penalty: 75% of the additional tax due to fraud

6. In rare cases, the IRS can press criminal charges.

When the IRS identifies fraud, the IRS can pursue civil or criminal charges.

The IRS prosecutes relatively few cases each year – and they usually involve large omissions of income, tax evasion or tax protest schemes, or lying to the IRS in an audit.

In 2016, the IRS prosecuted slightly more than 1,000 taxpayers for tax crimes. The IRS takes these cases seriously, with average jail times of over three years.

Can You go to Jail For Cheating on Your Taxes?

Many people are afraid of IRS audits — and maybe even going to jail if they make a major mistake. In fact, fear of an IRS audit is one of the main reasons that people strive to file timely and accurate tax returns each year.

But here’s the reality: Very few taxpayers go to jail for tax evasion. In 2015, the IRS indicted only 1,330 taxpayers out of 150 million for legal-source tax evasion (as opposed to illegal activity or narcotics).

The IRS mainly targets people who understate what they owe. Tax evasion cases mostly start with taxpayers who:

Misreport income, credits, and/or deductions on tax returns
Don’t file a required tax return

The IRS doesn’t pursue many tax evasion cases for people who can’t pay their taxes. But, if you conceal assets and income that you should use to pay your back taxes, that’s a different story.

Usually, tax evasion cases on legal-source income start with an audit of the filed tax return. In the audit, the IRS finds errors that the taxpayer knowingly and willingly committed. The error amounts are usually large and occur for several years – showing a pattern of willful evasion.

Here’s more about what the IRS looks for:

Unreported income: This is the biggest issue that brings taxpayers under criminal investigation. This includes leaving out specific transactions, like the sale of a business, or entire sources of income, such as income from a side business. This issue has gotten many gig economy workers in trouble with the IRS, when they leave out income from their side hustle.

Dodgy behavior during an audit: People who make false statements or purposely hide records (such as bank accounts) from an IRS auditor are headed for criminal prosecution. The IRS calls these behaviors “badges of fraud.” They’re hot buttons that indicate tax evasion.

Does the IRS Check Your Dependents?

The more dependents you can claim on your taxes, the lower your tax bill is likely to be. The IRS allows you to claim an exemption for yourself, your spouse and for each dependent you support.

Usually, your dependents are your children, but dependents may also be other children or relatives who live in your household or elderly parents you support. An exemption deducts money from your income to reduce your taxable income. But the IRS verifies your dependents to make sure these deductions are legitimate.

Social Security Number

The primary tool the IRS uses to verify dependents on your tax return is Social Security numbers. You must supply the Social Security number for every dependent you claim. You’ll need to obtain a Social Security number for your new infant.

The IRS computers compare the legal names and Social Security numbers of your dependents with the information in the Social Security database. If the names and Social Security numbers don’t match, the IRS computer kicks out the return with an error code and you’ll be asked to correct the information.

Taxpayer Identification Number

If your dependent is a resident alien or nonresident alien who doesn’t qualify for a U.S. Social Security number, you must supply their taxpayer identification number in lieu of their Social Security number. The dependent must submit an application to obtain a TIN.

If you are in the process of adopting a child from another country and the child lives with you, the child may not be eligible for either a Social Security number or a TIN. In this case, you must apply to the agency handling the adoption for an adoption taxpayer identification number.

As with Social Security numbers, the IRS matches the information you supply about your dependents on your tax forms with the information in TIN and ATIN databases as a way of verifying the validity of your dependent.

Dependent Claimed On More Than One Return

The same person can’t be claimed as a dependent on more than one return. A divorced or separated or never-married mother and father can’t both claim their child as a dependent in the same year.

The IRS computers look for the names and Social Security numbers of dependents who are claimed on more than one tax return and will take a closer look at both returns and try to determine who has the legitimate claim to the child as a dependent.

If you are a child’s non-custodial parent and you and the custodial parent have agreed that you will take the deduction for the child this year, you must complete a Form 8332 and attach the form to your tax return. This form authorizes you to claim the child as a dependent for that tax year.

Can I Claim my Internet Bill on my Taxes?

If you have a home office, you’re a sole proprietor or you do some of your work at home, you might be entitled to a break on your taxes. Since an Internet connection is often a necessary expense in order to make money, you’re allowed to deduct some of the cost on your 1040 tax return documents.

Of course, only the Internet usage actually used for business is deductible, so it’s important that you keep careful records and only deduct according to the amount of time you spent using the Internet for work.

Does the IRS Actually Look at Every Tax Return?

The IRS receives millions of tax returns every year from individuals and businesses, filed electronically and through the mail. As a result, the agency has developed an efficient system for processing these returns through the use of computers and highly trained staff.

If you file a tax return, someone will lay eyes on it; however, the depth of the review will not always be the same. The tax return review process has multiple steps, and not every return will be scrutinized carefully.

When you mail your completed tax returns to the IRS, a machine does the initial sorting, opening envelopes and setting aside returns that include payments by check. The returns move on to employees, who sort the returns based upon their type.

The returns are batched into groups, and the information they contain is entered into an electronic system by other IRS employees called data transcribers. Once the data is in the system, a computer checks the return for errors, such as mathematical errors; if none are found, the return is processed, and the IRS issues you either a refund or a balance due notice.

If errors are found, the return will be reviewed by a Tax Examiner, who makes any corrections and may contact you for more information if necessary. Once the corrections are made, the return will be processed.

For returns filed electronically, the process is far more streamlined, but the result is the same: your return will be reviewed by computers and live employees.

Can I Fake a W2?

Sure, it happens. But they rarely if ever get away with it. The same computer-check that picks up reported but omitted income will pick up claimed but unreported withholding.

In order to get anything, the W-2 has to show more in withholding tax than the tax calculated on the income that is shown on the W-2. (If it doesn’t, it would cost him money.)

Your W-2 is just a copy of what the employer files with the government, so “faking” a W-2 is literally just a piece of paper and doesn’t do anything as far as the IRS is concerned; would you think that you could avoid paying tax on your salary by tearing up your real W-2? This is the same thing. Whether or not you have a W-2 affects nothing.

Just like omitting income that is reported to the IRS by your employer on a W-2 will raise questions, claiming withholding that isn’t reported by anyone to the IRS will raise questions. And you won’t have any answers, other than a bogus W-2, which will hold up with the IRS for all of about 10 minutes if that long.

Can You Anonymously Report IRS?

If you have information about tax noncompliance but are not interested in an award, or you have other information you believe may be of interest to the IRS:

For information on how to Report Suspected Tax Fraud Activity, if you have information about an individual or company you suspect is not complying with the tax law, and you do not want to seek an award. You can remain anonymous.
The IRS sets professional standards for attorneys, certified public accountants and enrolled agents who represent taxpayers before the IRS. To learn more about those professional standards, or how to report a violation, see Office of Professional Responsibility At-A-Glance and Circular 230 PDF Violations.
Report Fraud, Waste and Abuse to Treasury Inspector General for Tax Administration (TIGTA), if you want to report, confidentially, misconduct, waste, fraud, or abuse by an IRS employee or a Tax Professional, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). You can remain anonymous.

Do You Get a Bigger Tax Refund if You Make Less Money?

Laying the groundwork for a tax refund requires some simple tax planning, a little research and some forethought. Reviewing your tax status, consulting your spouse when filling out your W-4s and taking advantage of several tax credits can help you increase your tax refund.

Review your W-4: Bigger refund or bigger paycheck?

When you start a job, your employer asks you to complete form W-4. This tells your employer how much federal income tax to withhold from your paycheck. Depending on what amount of income and which credits you specify on the W-4, the more or less tax will be withheld.

Having less taken out will give you bigger paychecks, but a smaller tax refund (or potentially no tax refund or a tax bill at the end of the year).

Factors to consider when completing your W-4 include:

Claiming credits such as the Child Tax Credit and the Other Dependent Credit will decrease the amount of your withholding
Adjusting for more withholding if you have additional income a second job or investments
Adjusting for less withholding if you are expecting to claim itemized deductions rather than the standard deductions
Any additional income tax you would like withheld from each paycheck

Specifying more income on your W-4 will mean smaller paychecks, since more tax will be withheld. This increases your chances of over-withholding, which can lead to a bigger tax refund. That’s why it’s called a “refund:” you are just getting money back that you overpaid to the IRS during the year.

By stating that you will be getting certain credits or deductions will mean bigger paychecks and likely a smaller refund (or perhaps owe some additional tax).

You can use a W-4 Withholding Calculator to help you estimate what you should enter on your W-4.

Revisit your filing status

Choosing the filing status that best suits your needs can influence the possibility of a refund. Your filing status determines:

Your standard deduction
Your filing requirements
The credits you are eligible to receive
The amount of tax you pay or the refund you receive

There are five statuses to choose from, but the most common are:

married filing jointly or separately
single
head of household

TurboTax can help you determine which choice most benefits your situation.

Claim the Earned Income Tax Credit

Working families, individuals, people who are self-employed and others who have a moderate to low income may qualify for the Earned Income Tax Credit. The EITC decreases the amount of taxes owed and may qualify you for a tax refund. To qualify, you must:

Have a valid Social Security number
Be a U.S. citizen, a year-long resident alien or a non-resident alien married to an American citizen or resident alien filing jointly
Have income from self-employment, from an employer or from working on a farm
Not be a claimed dependent or child of another person
Have a qualifying child and be between the ages of 25 and 65, living in the U.S. for at least half the year

To receive the EITC you must file a tax return, even if you owe no taxes.

Include the Child and Dependent Care Credit

The Child and Dependent Care Credit is based on a percentage of the amount you paid for the care of a qualifying child or dependent. The total expenses you can claim are capped at $3,000 for one eligible individual and $6,000 for two or more. If your employer offers dependent care benefits, you are required to deduct this amount.

Read Also: IRS Tax Debt Relief Program

A qualifying individual is:

Your child who is under 13 years of age
A dependent who is physically or mentally incapable of self-care and who lives with you for more than half the year, or
Your spouse who is incapable of self-care and lives with you for more than half the year

To claim the credit, other criteria must be met.

If you’re married, you are required to file a joint return.
You can’t use a caregiver who is a spouse or parent of the child, your child under 19 years of age or another of your dependents.
Each qualifying dependent and child must have a Social Security number added to your return.
You must provide the name, address and Social Security number of your caregiver.

Finally

Taxes can get complicated, and your situation may not be black and white. That’s why it’s important to take the time to gather all your records, research your IRS account (if needed) and even consider hiring a tax pro to prepare your return or amend a return you’ve already filed.

A good tax professional will always try to help you pay the lowest amount of tax or get the largest refund that you’re legally entitled to.