Deductions are a critical part of the United States tax code because they allow people to reduce the amount of tax they have to pay because of other payments they have already made or donations to charitable causes.
People can write off business-related expenses both incurred as part of a job for an employer and expenses they have to cover as someone who runs their own business or who is self-employed. It is also possible to write off medical expenses, educational costs and even charitable giving.
Some people will exaggerate or pad their deductions in order to minimize the taxes that they pay. Doing so can put that person at risk of legal consequences.
Big deductions might be a flag for IRS scrutiny
There isn’t a tax trick that you can think of that someone else hasn’t already attempted. The IRS routinely adjusts and tweaks its code specifically to avoid manipulation and abuse. They also carefully review filings for signs of fraud.
Substantial deductions that drastically alter your tax liabilities could be a red flag that leads to an audit. If you don’t have the necessary financial paperwork and receipts to validate those deductions, you could very well wind up owing the IRS quite a bit of money. You will have to pay the taxes you owe, as well as penalties that could be as high as 20% of the inappropriately claimed deductions.
In some cases, they might pursue fraud charges against individuals who intentionally abused deductions for financial gain. Fraud charges can mean that the penalty you pay goes up to 75%. If you face an audit or accusations of misusing deductions to reduce your tax liabilities, getting help early in the process to make a big difference in the consequences you face.