Penalties for Filing a False Tax Return

A false tax return is any filing that contains inaccurate information, whether the error is accidental or intentional. The Internal Revenue Service (IRS) has a structured system of penalties to address incorrect filings. These consequences vary significantly based on the nature of the inaccuracy, ranging from interest charges to financial penalties and criminal prosecution. The severity of the outcome is determined by the circumstances and intent behind it.

Distinguishing Error from Fraud

The primary factor the IRS considers when evaluating an incorrect tax return is the taxpayer’s intent. This separates a return with errors, often born from negligence, from a fraudulent return, which involves a willful attempt to deceive. Negligence is defined as a failure to make a reasonable attempt to comply with tax laws. It can include honest mistakes like a mathematical error, overlooking a source of income, or failing to keep adequate records.

Fraud is a deliberate act of deceit to evade paying taxes by intentionally misrepresenting facts on a tax return. Examples of fraudulent actions include underreporting large amounts of income, creating fictitious dependents or deductions, keeping two sets of financial books, or using a false Social Security number.

The IRS does not assume fraud when it finds an error. To establish fraud, the agency looks for specific indicators, sometimes called “badges of fraud,” which suggest a taxpayer’s actions were willful.

Civil Penalties for Inaccurate Returns

When the IRS determines a tax return is inaccurate, it can impose several types of civil monetary penalties. The most common is the accuracy-related penalty, under Internal Revenue Code Section 6662. This penalty is assessed at 20% of the tax underpayment, triggered by either negligence or a substantial understatement of income tax.

A substantial understatement of income tax occurs when the underreported tax exceeds a specific threshold. The understatement must be more than 10% of the correct tax liability or $5,000, whichever is greater. A taxpayer might avoid this penalty if they can show they had a reasonable cause for the error and acted in good faith.

The civil fraud penalty under IRC Section 6663 amounts to 75% of the tax underpayment from fraud. Unlike the accuracy-related penalty, the burden of proof for civil fraud falls on the IRS. The agency must establish by “clear and convincing evidence” that the taxpayer’s intent was to evade their tax obligations.

In addition to penalties, the IRS charges interest on any underpaid tax. Interest accumulates on the unpaid balance from the original due date of the return until the tax is paid in full. The interest rate is variable and compounds daily, significantly increasing the total amount owed over time.

Criminal Charges and Consequences

For intentional tax wrongdoing, the government may pursue criminal charges, which are handled by the Department of Justice. This path is reserved for situations classified as criminal tax evasion under IRC Section 7201. Tax evasion is a felony defined as a willful attempt to evade or defeat tax. This requires an affirmative act, such as filing a false return, concealing assets, or destroying records.

The consequences of a criminal conviction are separate from any civil penalties. A conviction for tax evasion can result in fines and imprisonment, with fines of up to $250,000 and a prison sentence of up to five years for each offense.

The legal standard for a criminal conviction is higher than for civil penalties. To secure a conviction, the government must prove the taxpayer’s guilt “beyond a reasonable doubt.” This means demonstrating that the taxpayer had a specific intent to defraud the government.

Correcting a False Tax Return

Preparation and Form Completion

A taxpayer who discovers an error on a previously filed return can correct it by filing Form 1040-X, Amended U.S. Individual Income Tax Return. Gather all necessary documents: a copy of the original tax return and any new or corrected informational documents, such as a W-2 or Form 1099.

The form requires showing the original figures, the corrected figures, and the net change between the two. A key part of the form is a written explanation of the specific changes being made and the reasons for them. This explanation should clearly detail each correction to income, deductions, or credits.

Submission and Post-Filing

Taxpayers can file Form 1040-X electronically for the current tax year and the two previous years. For earlier tax periods, a paper return must be mailed to the designated IRS service center. Attach copies of any new or corrected documents that support the changes made on the amended return.

Processing an amended return can take several months, and the status can be tracked online through the IRS’s “Where’s My Amended Return?” tool. If the changes result in a refund, the IRS will issue it. If the changes result in additional tax owed, the IRS will send a bill for the tax, plus any applicable penalties and interest.