Penalties for Filing a False Tax Return

The United States tax system is built upon the principle of voluntary compliance, where individuals and entities are expected to accurately report their financial information and pay the correct amount of tax. When a person files a tax return containing information they know to be incorrect, it is considered a false filing. The Internal Revenue Service (IRS) views these actions seriously because they undermine the integrity of the entire tax structure. Filing a false return involves more than a simple mathematical error; it implies an intent to deceive. The repercussions vary based on the nature and severity of the falsehood, making the distinction between an honest mistake and deliberate misrepresentation important for understanding the penalties.

Actions Constituting a False Filing

A variety of actions can lead the IRS to determine that a tax return is false or fraudulent. These actions represent a deliberate attempt to misrepresent one’s true tax situation and can include:

• Underreporting or omitting income, which includes failing to report cash payments, freelance earnings, or investment income.
• Claiming deductions or credits for which one is not eligible, such as inflating charitable donations or claiming non-existent business expenses.
• Inventing dependents to claim additional exemptions and credits.
• Falsifying documents to support incorrect claims, such as creating fake receipts or altering a Form 1099.
• Choosing an incorrect filing status to lower tax liability, like filing as Head of Household when not qualified.

Civil Penalties for Inaccurate Returns

When the IRS identifies inaccuracies on a tax return, it can impose civil penalties, which are monetary fines intended to punish the taxpayer and deter future non-compliance. These penalties are distinct from criminal charges and are assessed directly by the IRS.

A common penalty is the accuracy-related penalty. This penalty is 20% of the portion of the underpayment of tax resulting from specific triggers, including negligence, disregard of the rules, or a substantial understatement of income tax. For instance, if a taxpayer underpays their tax by $10,000 due to carelessness in applying tax law, the accuracy-related penalty would be $2,000.

A more severe civil penalty is the civil fraud penalty, which is 75% of the underpayment of tax that is attributable to fraud. If a taxpayer fraudulently underpaid their taxes by $10,000, the civil fraud penalty would be $7,500.

The burden of proof for the civil fraud penalty rests with the IRS. The agency must show with clear and convincing evidence that the taxpayer’s actions were not mistakes but were undertaken with the specific intent to defraud the government.

Criminal Prosecution for Tax Fraud

In the most serious cases of false filings, the government may pursue criminal prosecution, which can result in substantial fines and imprisonment. These cases are referred to the Department of Justice for prosecution. Unlike civil penalties, criminal convictions must be proven “beyond a reasonable doubt.”

A central element in any criminal tax case is the concept of “willfulness.” For a conviction, the prosecutor must demonstrate that the defendant voluntarily and intentionally violated a known legal duty.

One of the primary criminal charges is tax evasion. This statute makes it a felony to willfully attempt in any manner to evade or defeat any tax. A conviction for tax evasion can lead to fines of up to $100,000 for an individual ($500,000 for a corporation) and imprisonment for up to five years. This charge requires an affirmative act to mislead the government, such as keeping a double set of books or hiding assets.

Another significant criminal charge is filing a false return under penalty of perjury. This law makes it a felony to willfully file a tax return that the filer does not believe to be true and correct as to every material matter. The penalties for this offense include fines of up to $100,000 ($500,000 for a corporation) and imprisonment for up to three years.

How to Correct a False Tax Return

The primary method for correcting a previously filed tax return is by filing Form 1040-X, Amended U.S. Individual Income Tax Return. This form allows individuals to report any changes to their income, deductions, or credits from the original return.

When completing Form 1040-X, the taxpayer must explain the specific changes being made and attach any affected schedules or forms. Filing an amended return can help mitigate penalties, especially if done before the IRS initiates an audit, and it starts the statute of limitations for the changed items.

For those facing potential criminal prosecution, the IRS offers a Voluntary Disclosure Practice. This program allows taxpayers who have willfully violated tax laws to come into compliance. To be eligible, the disclosure must be timely, meaning the IRS has not yet initiated an investigation. The taxpayer must cooperate in determining the correct tax liability and arrange to pay the tax, interest, and penalties, and in return, the IRS will generally not recommend criminal prosecution.