When you think of someone committing fraud, your mind probably drifts to identity thieves or faux Nigerian princes huddled in the dark corners of the internet. But if you're not paying close attention this tax season, that fraudulence could be your own.
Individual tax slip-ups typically result from simple negligence rather than intentional fraud. But even tiny white lies fall into the latter category. The IRS is serious about nipping fraud in the bud. For the 2016 tax season, the agency increased the number of fraud-identifying electronic filters to 183, furthering its mission to stop fraudulent tax returns.
Check and double-check these seven potential red flags before you lick that stamp or click the "submit" button this April. That way, you can avoid accidentally committing tax fraud.
1. Wrongly Claiming the Earned Income Tax Credit
Claiming the Earned Income Tax Credit when you're not eligible for it is "one of the biggest audit triggers," wrote Las Vegas-based criminal defense attorney Brian J. Smith at his firm's website.
This credit is designed to offset the burden of Social Security taxes for low-to-moderate earners. If you qualify, you can save thousands of dollars on your return. To qualify for the 2016 tax year, you must meet specific income requirements, such as making a maximum of $39,296 if you're single and claiming one qualifying child.
How to avoid it: Don't file for the EITC if you have investment income exceeding $3,400. Child support, alimony, welfare compensation and workers' compensation benefits do not contribute toward earned income. Your eligibility might fluctuate from year to year, so always read the requirements closely. Don't assume you qualify this year just because you qualified last year. Again, tax software can help clarify your eligibility.
2. Filing a Return With Missing or Incorrect Information
If you paid thousands of dollars for college this year, you might be eligible to claim an education tax credit to reduce your taxes. However, if you claim an education credit, don't forget to include Form 8863 — "Education Credits" — with your return. Likewise, forgetting to include vital data such as your Social Security number or taxpayer identification number can create headaches.
Typically, these types of omissions result in delayed processing of your tax return. But they can also prompt the IRS to take a closer look at your tax forms, possibly even making you the target of tax fraud cases. For instance, if your omitted data takes you from owing money to earning a refund — or even just enlarges your refund — your mistake might be interpreted as tax fraud.
How to avoid it: Professional tax preparers or tax preparation software can come in handy here. For example, you can use tax software with built-in e-filing that won't let you submit forms unless all necessary data is included.
3. Claiming the Wrong Deductions
It might seem smart to take the family along on a business trip and then deduct the vacation as a business expense, but that won't fly with the IRS. If you truly were there for business, you probably can claim some expenses as deductions. However, forget about claiming your family's side trip to the Wizarding World of Harry Potter on the way home.
Some commonly misused deductions — such as writing off groceries that weren't explicitly bought for clients or employees — are simply mistakes. But if you make false statements on your return willingly, you're looking at possible imprisonment of up to three years or fines of up to $250,000 for false statements.
How to avoid it: Tax preparation software comes in handy, as it typically explains the deductions for which you qualify.
If you're going "old school," get some tax help from the IRS website, which offers tips for deducting business expenses. This site hosts a full breakdown of what you can legally deduct. You will find key documents such as publications 535, 334 and 538, which break down business expenses and offer tax guides for small businesses.
4. Taking Inflated Deductions
In 2015, the already tiny chance — less than 1 percent — of being audited by the IRS was at an 11-year low. That makes it extra tempting to claim your entire basement studio space for a home office deduction, even though you use half of it as a gym. But doing so is illegal.
How to avoid it: Don't stretch the truth. The long-term penalties can easily outweigh the short-term savings. If you think you'll be too stretched to pay what you owe all at once, work out a payment plan or installment agreement with the IRS rather than fibbing on your deductions.
5. Failing to Report Income
Several years ago, it was estimated that waiters and waitresses who received tips failed to report billions worth of income to the IRS over a multi-year period. Despite increased efforts from the IRS to crack down on the hospitality industry, it remains an easy tax item to fudge.
In fact, the IRS imposes specific penalties for not reporting tips, subjecting guilty parties to a penalty equal to 50 percent of the Social Security, Medicare, additional Medicare and railroad retirement taxes you owe on unreported tips. Regardless of your industry, willful failure to supply information can lead to imprisonment or fines of up to $100,000.
How to avoid it: Don't fall victim to common misconceptions. For example, some people wrongly believe that you do not have to report under-the-table income or payments of less than $600. In fact, there is no minimum amount that you can exclude from gross payments. Commissions, royalty payments, fringe benefits and even baby-sitting fees — among many others — count as compensation, and that compensation must be reported.
For a full breakdown of taxable and nontaxable income, refer to Publication 525 from the IRS, and keep it handy as you file this year.