Some taxpayers have a schedule A or Schedule C illegally attached to their Form 1040 that causes in some cases an understatement of tax liability and in other cases an overstatement of refund. Taxpayers who knowingly or unknowingly fall in this category are subject to audit and are receiving letters from the IRS. The status of limitations could be 3 years, 6 years, or no status of limitations in the case of fraud.
Most taxpayers can no longer claim the itemized deduction to lower their tax liability because of the elimination of some deductions and the doubling of the standard deduction. Yet, some tax returns preparers continue to illegally attach a schedule A or Schedule C, and some cases include both, to some taxpayers’ tax returns.
You don’t want a schedule A or C attached to your tax return when you did not have 1) over $10,000 real estate and property tax payments, 2) high mortgage interest payments, 3) documented qualified charitable contributions,and 4) income from self employment?
You could save a lot of money by reviewing your tax return before you sign it because an amendment and the penalty could very costly.
- Pedro Case. For tax period 2017, Pedro is audited by the IRS because he took some frivolous business deductions on schedule C that lowered his taxable income and helped him to qualify for earned income credits. The deductions and credits were disallowed and, consequently, Pedro owes a balance of more than $12,000. The balance includes tax due, penalty under section 6662, and interest under section 6601.
- Sandra Case. For tax year 2016, Sandra is in trouble because she took some excessive charitable and mortgage interest deductions that lowered her over $250,000 of income to qualify for earned income and education credits. She now owes over $50,000 unless she could prove the deductions. She is in trouble because she has no evidence to prove her deductions and she would not be able to travel outside the country or renew her passport because her case could be reported to the Department of State.
Both individuals claim that they were not aware of the fictitious deductions until they received the audit letters. A taxpayer is liable for any information included in the tax return. Further, you sign your tax return under penalty of perjury. Thus, it is critical to know your return and question a high tax refund or any information that would raise suspicion, specially as middle income or high income earners.
Accuracy-related penalty under section 6662– A penalty of 20% of unpaid tax may be due if the tax is underpaid due to:
- Negligence or disregard of the rules or regulations, or
- Substantial understatement of income tax. The understatement is substantial if it is more than the largest of 10% (5% if the taxpayer claims section 199A deduction) of the correct tax or $5,000.
In certain cases, the accuracy related penalty could be 40%.
The negative impact of the pandemic will certainly continue for a long time. Both states and federal governments have lost a lot of revenue. It is very likely that there would be stricter enforcement of applicable laws and statutes. The Internal Revenue Service is expected to finally get more money to allocate to tax laws enforcement.