Penalty for Filing a False Tax Return
Understanding the Consequences of Filing a False Tax Return in Mississippi
Transparency and prompt action are always your best defenses against the repercussions of a false tax return. Mistakes can and do happen, and sometimes the temptation to fudge the numbers is strong. Understanding the procedures involved in dealing with an errant return, the potential penalties for negligence and for true false returns, and learning about the avenues for resolution you can explore with your lawyer can all provide peace of mind and clarity.
What Is a “False Tax Return?”
A false tax return is a tax document submitted to the IRS (or to the Mississippi Department of Revenue) that contains inaccurate information. Whether due to negligence, misunderstanding, or intentional misconduct, the presentation of incorrect data to tax authorities can lead to substantial penalties.
A tax return becomes officially “false” when it underreports income, overstates deductions, or provides any other misleading information that reduces a taxpayer’s legitimate tax obligation. Examples include failing to report freelance income, claiming personal expenses as business costs, or hiding foreign bank accounts.
It’s important to note that honest mistakes don’t categorize a tax return as false. Instead, there needs to be a certain level of intent or even gross negligence involved for it be considered a false return.
Consequences of Filing a False Return
The penalties for submitting an erroneous tax return can be severe. They range from fines to potential imprisonment, depending on the severity and intent of the falsehood.
Financial Penalties
The IRS imposes a penalty of 20% of the underpayment for any understatement of tax liability due to negligence or disregard of rules, or in cases where they are simply unable or unwilling to prove intent. If the underpayment is found to be due to intent, the penalty rises to a hefty 75% of the underpayment.
Interest Charges
In addition to penalties, the IRS charges interest on unpaid taxes, starting from the due date of the return until the complete amount is paid.
Criminal Charges
In cases where there is evidence the wrong information was given on purpose, the IRS might pursue criminal charges. This is rare, but it is a possible penalty for submitting false tax returns if there is substantial evidence of willful intent, and especially if there is a pattern or history of misreporting income. Tax evasion, the more severe form of tax fraud, can be punished with imprisonment for up to 5 years, while a conviction for filing a fraudulent return can result in a 3-year prison term.
Statute of Limitations
Typically, the IRS has three years from the date of filing to audit a return. However, if there’s a substantial understatement of income (more than 25%), this period extends to six years. In cases of fraud, there’s no time limit, and the IRS can review the return at any point in the future.
How to Respond if You’re Accused of Filing a False Return
If you’re notified by the IRS about discrepancies in your return, it’s crucial to respond promptly. Ignoring such notices can exacerbate the situation. It’s also important to consult a tax attorney immediately to assess the claim’s legitimacy and determine the best course of action. Often, just providing some additional documentation or clarification can resolve the issue without serious penalties.
If penalties are levied, there might be avenues to negotiate or reduce the amount, especially if there’s evidence to prove your errors weren’t intentional; or at least a complete lack of evidence suggesting that it was.
IRS Procedures for Detecting False Returns
The Internal Revenue Service is very skilled at identifying and addressing potentially false returns. Their methods for finding out fraud include a combination of sophisticated technology, random sampling, and targeted audits.
Automated Systems
The IRS uses computerized systems that match the information on taxpayers’ returns to data reported by employers, banks, and other institutions. If there’s a discrepancy, such as unreported income, the system flags it for further review.
Targeted Audits
Certain activities or deductions can raise red flags with the IRS. For instance, if you’re consistently reporting business losses or making disproportionately large charitable donations, this might trigger a closer look.
Random Audits
While these are rarer, the IRS does select a small percentage of returns for random audits. This means that even if there’s no apparent issue with a return, it could still be reviewed for accuracy.
Addressing Mistakes Before They Escalate
If you’ve made a genuine mistake and now realize the error, it’s crucial to take corrective action as soon as possible. If you discover a mistake, you can file an amended tax return using Form 1040-X. This form allows taxpayers to make necessary corrections to their original return.
However, it’s also important to first decide whether the mistake actually warrants an amendment. If you’ve just made a minor computational error or forgotten to add an attachment, the IRS will typically correct these on their end and send you a notice. However, if you’ve missed deductions or have unreported income, filing an amended return is often the right way to go.
If you believe the error could lead to a penalty, consult with a tax attorney right away. They can provide guidance on the best course of action for your situation and potentially mitigate any repercussions.
False Returns vs. Negligence
It’s essential to differentiate between intentional deceit and negligence. Negligence is not actually a “false return.” It’s a simple mistake, and not all mistakes on tax returns are considered fraudulent. The IRS recognizes that tax laws can be complex and that unintentional errors do occur.
However, repeatedly making the same mistakes or showing a pattern of underreporting can shift the perception, and the IRS will likely suspect you of intentional wrongdoing. In such cases, the penalties are more severe.
Negligence typically incurs a penalty of 20% of the underpayment amount, while fraud can lead to a 75% penalty. It’s in your best interest to demonstrate that any errors were indeed unintentional, if you can.
Open All IRS Correspondence
If the IRS suspects discrepancies, they will contact you through mailed notices. Address these promptly, as ignoring them can only compound the issue. If you make a good faith attempt to stay in contact and resolve the issue, the IRS will notice: they will also notice if you don’t.
Consider Mediation
If you find yourself in a disagreement with the IRS, consider the IRS’s mediation programs. These offer an alternative to traditional court proceedings and can be a more efficient and less adversarial way to resolve disputes than going to court. Your tax attorney can help you here, too.
True False Tax Returns: Legal Perspective and Recommendations
Immediate and decisive action is crucial if you have actually filed a false return. If you find yourself in such a position, follow these steps:
Retain Legal Counsel Immediately
This should be your first step. Engaging an experienced tax attorney ensures you have someone familiar with tax laws, the IRS, and all the potential consequences on your side to provide guidance that’s tailored to your situation. Attorney-client privilege ensures your discussions remain confidential, allowing you to share the complete truth and get the best advice possible.
Assess the Extent of the Error
With your lawyer, review the false information on the tax return to understand the magnitude of the discrepancy. Was it that you overclaimed a deduction? Have you neglected to report substantial unreported income? This assessment is critical in determining the next steps.
File an Amended Return
If you and your lawyer determine it’s in your best interest, consider filing an amended return. This allows you to correct any inaccuracies in your previously submitted return. While this doesn’t mean there’s no possibility of penalties or interest, it demonstrates good faith in making things right.
Prepare for Potential Consequences
Deliberately submitting a false tax return can result in penalties, interest, and even criminal charges in the most serious cases. Your lawyer can help you understand all the potential outcomes and how best to navigate them. In some cases, being proactive might lead to lesser penalties.
Be Open and Transparent with the IRS
If the IRS contacts you about the discrepancy, respond promptly, but always with the guidance of your lawyer. While it might be tempting to avoid or delay communication, or to dash off something quickly without asking your attorney, this is likely to just make the situation worse.
Learn About Your Rights
Even if you’ve submitted a false return, you still have rights as a taxpayer. Your lawyer can ensure these rights are upheld throughout the process, and you should not think that you’ve forfeited these rights, even if you’ve submitted a false return.
Think Through Potential Repayment Plans
If you owe taxes, penalties, or interest, your lawyer may be able to help you negotiate a payment plan with the IRS. Such arrangements can make the financial burden more manageable over time, and if you have a feasible plan hashed out with a tax law expert, the IRS is more likely to approve it.
Move Forward
Everyone makes mistakes, but it’s essential to learn from them. Going forward, ensure you understand your tax obligations, keep comprehensive records, commit yourself to honesty in your tax returns, and work with reputable tax professionals and attorneys, especially if you have a complicated tax situation, in order to get the best result.
Preventive Measures for Taxpayers
To avoid making mistakes or submitting false tax returns and suffering the accompanying penalties, there are a few best practices it’s always wise to follow:
Maintain Thorough Records
Keep meticulous records of all your financial transactions, especially any that you’re claiming as deductions. This will be your saving grace if you’re ever audited. These records can substantiate claims and clarify any potential misconceptions.
Stay Updated on Tax Laws
Tax laws and regulations can change with shocking regularity. By staying informed, you can ensure your return is compliant with the latest requirements. Talk with a qualified tax lawyer to make sure you’re not missing something before you file.
Seek Professional Help
If you’re unsure about any aspect of your return, it’s always wise to consult a tax professional. Their expertise can help you identify potential issues before they become problems.
Addressing Tax Concerns Quickly
Postponing or neglecting concerns related to your tax returns can compound the issue and result in accruing additional interest and penalties. Addressing discrepancies promptly can save you time, money, and unnecessary stress in the long run.
When tax obligations aren’t met, the resulting penalties and interest don’t remain static. Over time, interest compounds on both the unpaid amount and the penalties, leading to an ever-growing debt. Addressing issues head-on also reduces the risk of further audits or increased scrutiny from the IRS in subsequent years. Demonstrating your willingness to engage with the issue can also favorably influence any negotiations or discussions you have with tax authorities.
Finally, don’t forget that your tax records can influence all your financial endeavors, from securing a mortgage to establishing business credit. Ensuring your tax returns are accurate and free from discrepancies can improve your financial reputation.
Rights of Taxpayers
Every taxpayer has a set of rights when dealing with the IRS:
Right to Be Informed
You have the right to know what’s required to comply with tax laws, what the IRS is doing about your case, and why.
Right to Quality Service
You are entitled to prompt, professional, and courteous service from IRS employees.
Right to Challenge the IRS’s Position
If you disagree with the IRS’s findings, you have the right to object and provide additional documentation.
Right to Appeal
Should you disagree with the IRS’s decision in your case, you have the right to take the matter to court.
Common Misconceptions About False Tax Returns
Mistakes Always Lead to Audits
Many believe that any error on their tax return will automatically trigger an audit. While mistakes can raise flags, the IRS understands that genuine errors occur. Not every error will lead to an audit, especially if it’s minor and does not significantly impact the amount of tax you owe.
Only High Earners Get Audited
Another misconception is that only individuals with high incomes or complex returns face audits. The truth is that the IRS can audit anyone, regardless of income. Sometimes returns are selected at random; other times, specific activities might trigger a review.
Amending a Return Always Raises Red Flags
Some taxpayers hesitate to file an amended return, thinking it will automatically draw the IRS’s attention. While you never want to amend tax returns for light reasons, and the IRS will notice if you’re amending returns every year, if you’ve identified a serious mistake it’s often better to address it proactively rather than wait for the IRS to find it.
Using Tax Professionals Guarantees Error-Free Returns
While hiring a professional does reduce the risk of errors, it doesn’t eliminate it. Always review your return, even if it’s prepared by someone else, to ensure that it’s accurate.
Tax Preparer Responsibility
While people rely on tax professionals to prepare their returns, don’t forget that the taxpayer is always ultimately responsible for the information provided to the IRS. That said, tax preparers have responsibilities and can face penalties if they are found to be intentionally or negligently submitting false information on behalf of a client.
Tax professionals are expected to exercise due diligence when preparing a client’s return. This means they should ask pertinent questions, review all supporting documentation, and advise you correctly according to the law and best practices based on the information you provide.
If a tax preparer is found to have recklessly or intentionally disregarded tax rules or regulations, they can face serious penalties. Be cautious, and choose your tax professional wisely. Ensure they have the necessary credentials, a good reputation, and are up-to-date with current tax laws. Always review your returns thoroughly before submitting, even if they’re prepared by a professional, to ensure accuracy and comprehension.
Potential Red Flags with Tax Professionals
While many tax professionals offer valuable services, be aware of a few potential red flags and avoid preparers who fly them:
Promising Huge Refunds
Be skeptical of anyone promising significantly larger refunds than expected without a clear rationale.
Avoiding Documentation
A preparer who doesn’t ask for comprehensive documentation or one who ever suggests that you fabricate a record or that the IRS won’t notice errors should always be avoided.
Unavailability After Tax Season
Choose a preparer who will be available to answer questions or address concerns even after the tax season is over. Look for preparers with an established presence and reputation in the community.
Filing a Return Without Review
You should always have the opportunity to review your return before it’s submitted. A tax preparer should never file without first consulting you and having you review the documents.
The Role of Tax Attorneys in Resolving Discrepancies
Tax attorneys are your lifeline when discrepancies arise and you’re accused of submitting a false return. Their expertise extends far beyond that of tax preparers. Your attorney understands tax law, is equipped to represent you, and can offer you confidential guidance through potentially challenging situations.
Some of what your tax attorney can do includes:
Represent You Before the IRS
If the IRS contacts you for an audit or to address discrepancies in your return, having a tax attorney by your side can make a huge difference in every way. They can communicate on your behalf, ensuring that your rights are upheld and that you’re provided with fair treatment. They can also talk to the IRS without allowing emotions to get the better of them, and they know how to convincingly argue on your behalf.
Negotiate Settlements
In cases where you have outstanding taxes, penalties, or interest, tax attorneys can assist you in negotiating settlements or payment plans with the IRS that work for your budget. This can lead to more manageable payment terms than you might be able to get on your own: or even reduce the total amount you own.
Guide You in Complex Tax Situations
For those with especially complex financial situations, like those who own a business or have assets in multiple states or countries, tax attorneys can provide special insight on how to best manage tax obligations.
Protect Your Rights
As discussed earlier, taxpayers have rights, but it’s easy to forget that when a powerful government organization comes knocking. Tax attorneys ensure that your rights are not infringed upon, providing you with some peace of mind and confidence in dealing with the IRS.
Tax Attorney Help When a Tax Preparer Makes Mistakes
Discovering that your tax preparer’s negligence or fraudulent actions have led to you being accused of submitting a false tax return is obviously a highly stressful situation to be in. While the ultimate responsibility for the accuracy of any tax return lies with the taxpayer submitting it, there are legal avenues you can pursue if a tax preparer’s actions have caused or contributed to your false return.
Under federal law, tax preparers can be held liable for both civil and criminal penalties if they act negligently or engage in fraudulent activities that lead to the submission of inaccurate tax returns.
If a tax preparer is found to have acted negligently or intentionally disregarded tax rules, they may be subject to civil penalties. For example, they can be penalized for understating your liability or for not exercising due diligence when claiming certain tax benefits or credits for a client. In more severe cases, where there’s evidence of willful fraud or deceit, tax preparers can face criminal charges, which may include hefty fines and even imprisonment.
Steps to Address Preparer Negligence or Fraud
Seek Legal Counsel
Always engage a tax attorney who specializes in tax law if you’re told you have submitted a false tax return, but especially if you don’t know how it happened and a tax preparer did your returns. Your lawyer can recommend the best course of action and help you figure out if your tax preparer might be to blame.
Report the Preparer to the IRS
Your lawyer can help you file a complaint against a tax preparer using IRS Form 14157, “Complaint: Tax Return Preparer.” If you suspect the preparer’s actions were fraudulent, you can also submit Form 14157-A, “Tax Return Preparer Fraud or Misconduct Affidavit.”
Seek Restitution
Depending on your situation, you might be able to pursue legal action against the tax preparer to recover financial losses, penalties, or interest payments incurred due to their negligence or fraudulent actions. Ask your tax lawyer about your options here, as it will depend on your circumstances.
Amend Your Tax Return
To correct any inaccuracies in your tax return caused by the preparer, file an amended return using IRS Form 1040-X. Be sure to do this under the guidance of a reputable tax professional or attorney.
Engage with the IRS
If you receive any notices or communication from the IRS regarding discrepancies in your return, respond promptly. Explain the situation, provide any evidence you have of the tax preparer’s negligence or fraud, and demonstrate that you’re taking a proactive approach to rectifying the situation.
Consider Reporting to the State Authorities
In addition to federal recourse, states have regulatory bodies overseeing tax preparers. If you believe a tax preparer has acted negligently or fraudulently, consider reporting them to the Mississippi State Board of Public Accountancy.
Protecting Yourself in the Future
To reduce the risk of having a problem in the future:
- Always review your return thoroughly before it’s submitted, even if prepared by a professional.
- Conduct thorough research before selecting a tax preparer. Check their credentials, read reviews, and ensure they’re registered with the IRS and the Mississippi State Board of Public Accountancy.
- Avoid tax preparers who base their fees on the size of your refund or promise unusually high refunds without justification.
Contact a Qualified Tax Attorney for Help
Tax obligations are a part of life, and there’s no denying they come with their share of complexities. False tax returns, whether genuinely false or actually mistakes you didn’t mean to make, can lead to significant repercussions. Never let the grass grow under your feet in addressing these issues.
If you understand the potential penalties for a false tax return, the best practices and processes to avoid issues, and the preventive measures that will help you avoid mistakes, you’ll be in good shape going forward. And when any uncertainties or issues do arise, the help of qualified and experienced tax attorneys is indispensable.
At Damiens Law Firm, PLLC, we’re committed to providing clarity, support, and expertise in all matters related to tax law. If you have concerns about your tax returns or are facing challenges with the IRS, let us help. Contact us today at (601) 957-9672 to secure your financial future and find peace of mind.
