WASHINGTON, DC (February 18, 2016) Many people know someone who has neglected to file a tax return, or brags about his or her questionable deduction claims. Just as it didn’t end well for gangster-cum-tax evader Al Capone, it doesn’t usually end well for modern-day tax cheats. These days, the IRS uses efficient automated systems to determine which returns it audits, and generally can include returns filed within the last three years. If income is substantially underreported, IRS’ audit window increases to six years. In the case of fraud, IRS has no time limitation for audit. Although the most common punishment meted out by IRS is monetary penalties, some of which may be substantial, criminal prosecution—and even prison time—are possible when you mess with the IRS.
Who is likely to wind up being audited by the IRS? It’s often small businesses. When asked why this is the case, enrolled agent Alan Pinck of A. Pinck and Associates is San Jose, CA, quoted the quip often attributed to bank robber Willie Sutton: “Because that’s where the money is.” Pinck goes on to explain that “…an unincorporated small business owner must file a Schedule C form along with his or her personal income tax return that outlines business income and expenses. Since documentation such as receipts and other business records are not included with the return, the IRS gives them double scrutiny.”
Falsely claiming deductions often leads to penalties including $5,000 for filing a “frivolous return” – one that doesn’t include the necessary information to determine if the return is correct. In cases of tax fraud, the IRS may not only force the taxpayer to cough up the amount of tax that is due, it can also assess a penalty of 75 percent of the amount owed.
While honest mistakes will generally not land you in jail, options for those running a business out of their home such as whether to use the Simplified Home Office Deduction or the Regular Method can be a real headache. (The Simplified method reduces the burden of bookkeeping, but you may pass up money.) An increasingly popular option is to hire a licensed preparer to handle your taxes. Any paid preparer must have an IRS issued preparer tax identification number (PTIN) in order to legally prepare your tax return. To ensure your tax preparer is up on the constantly changing tax law, it’s a good idea to hire tax pro that is required to complete annual continuing tax education. Enrolled agents (“EAs”) must pass a stringent three-part exam on tax law administered by the IRS and report annual continuing education in order to maintain their credential. You can find an EA in your area using the searchable directory at eatax.org.
NAEA is a non-profit membership organization composed of tax specialists licensed by the US Department of the Treasury. NAEA members are dedicated to maintaining the highest professional standards and to increasing the integrity of the tax administration system. They must abide by a code of ethics and professional conduct, and must complete annual continuing education that surpasses the IRS requirement.