The tax filing season runs from February 12, 2021 through April 15, 2021!

A majority of taxpayers are currently facing the sad reality resulting from a fraudulent Schedule C or Schedule A. In many instances, the harm is devastating because some taxpayers have benefited from fraudulent refund for 3 years without knowing that they could have to repay that money with interest, plus penalty and possibly criminal investigation and prosecution.

In cases that the same tax preparer filed your 2017 tax return and you have received a huge refund for the past 3 years, if you are currently under audit by the IRS for tax year 2017, it is very likely that you would be audited for 2018 and 2019. In most cases, a taxpayer could be audited within 3 years of filing the return.

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 or increased mortgage payments, property taxes, unqualified losses, and charitable contributions on Schedule A to lower the clients tax liability. Taxpayers who knowingly or unknowingly fit in this category are subject to possible audit or are receiving letters from the Internal Revenue Service.

The Internal Revenue Service and the Department of Justice are prosecuting some of those tax preparers more than ever before because some of them are also being reported. However, the taxpayers who benefited from their misdeeds are still liable to repay the money to the Treasury and in some cases face criminal prosecution.

For tax year 2020, the standard deduction is $12,400 for single filers and married filing separately filers, $18,650 for head of household filers, and $24,800 for married taxpayers filing jointly. There is an additional $1,300 for married filing jointly taxpayers who are blind or over 65; and an additional $1,650 for single taxpayers and head of household who are blind or over 65. Ensure that you do not have a Schedule A attached to your return if your deductible expenses are not greater than your standard deduction.

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

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:

. 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%.

Andrea and Andrew case. For tax period 2017, 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 other credits. The deductions and credits were disallowed. As a result, the couple has a past due tax 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. 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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