Many taxpayers who did not receive income from self employment have a schedule C or A attached to their Form 1040 that causes in some cases an understatement of tax liability and in other cases an overstatement of refund. There are instances where the schedule C is used to increase the taxpayers income and thus illegally increase their earned income credit. Some tax preparers also added fictitious mortgage payments and charitable contributions on Schedule A to lower clients tax liabilities. Taxpayers who knowingly or unknowingly fit in this category are subject to possible audit or are receiving letters from the Internal Revenue Service.

Despite the fact the IRS and the Department of Justice are prosecuting some of those tax preparers more than ever before, the taxpayers who benefited from their misdeeds are still liable to repay the money to the treasury.

For tax year 2019, the standard deduction is $12,200 for single filers and married filing separately filers, $18,350 for heads of household filers, and $24,400 for married taxpayers filing jointly.

Do you want a schedule C (self employment income/loss) and/ or a Schedule A (itemized deductions) on your tax return when you do not have evidence to prove them?

When you did not legitimately have income from self employment or receive a Form 1099-MISC or other forms that should be reported on a Schedule C, but a schedule C and/or a schedule A was or were attached to your tax return to either lower your tax liability to qualify for some credits and get more refund, or to increase your income to get you more earned income credit and other credits, you could be audited within the status of limitations applicable to your situation.

The status of limitations is generally 3 years, 6 years, or no status of limitations depending on the severity of the case, like fraud. Once a tax liability is timely assessed, the IRS has 10 years to collect the tax debt.

Accuracy-related penalty under IRC section 6662.

A penalty of 20% of unpaid tax may be due if the tax is underpaid due to:

  1. Negligence or disregard of the rules or regulations, or
  2. 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%.

Samy case. For tax period 2016, the couple was audited by the IRS because they took some frivolous business deductions on schedule C that lowered their taxable income and helped them to illegally qualify for earned income and child tax credits. The deductions and credits were disallowed. As a result, the couple owes a balance of $12,843.96.

  1. Tax due: $9,802.00
  2. Penalty under section 6662- $1,960.40
  3. Compound Interest under section 6601- $1,081.56

It is helpful to review your tax return to find out if a fraudulent schedule C or schedule A is or was attached to it because the penalty could be very costly. Further, before signing you tax return, review: line 1 (wages), line 7a (Other income), line 9 (Standard or itemized deductions) and line 20 (Refund). Ask questions!

Generally, you could amend your tax return within 3 years after the date you timely filed your original return or within 2 years after the date you paid the tax, whichever is later.

For Further reading: IRC sections 6662, 6601, Treas. Reg. sec. 1.6662.

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