Did You Falsify Business Expenses on Schedule C?
For reference, falsifying business/consulting expenses on a tax return is a very common situation, so if a Taxpayer finds themselves in this type of scenario explained below, realize that there are proactive actions that the taxpayer can take to minimize any collateral damage from falsifying business expenses to the IRS. In a typical situation, a W-2 taxpayer may have earned a significant amount of income but unfortunately does not have any deductions to offset the income. Since the U.S. Government did away with SALT, taxpayers who previously were able to deduct their state taxes on their U.S. tax return are no longer able to do so. While some states such as California offer a SALT workaround, it typically only applies to business owners. As a result, the taxpayer may create a falsified consulting business on Schedule C and create fake business expenses to have a loss that flows through and offsets their W-2 income. Unfortunately, this is a type of tax fraud and depending on the level of fraud could potentially be criminal tax evasion. So, what does a taxpayer do when they want to resolve the issue of falsifying business expenses on Schedule C?
Has the IRS Contacted the Taxpayer?
The first thing to consider is whether the IRS has already reached out to the taxpayer or whether the taxpayer wants to resolve the issue with the IRS before the IRS contacts them. The reason this is important is because if the IRS has already reached out to the taxpayer it may limit certain options available to resolve — such as entering the IRS Voluntary Disclosure Program.
Paid Tax Preparer or Shadow Preparer
Next, it is important to determine whether the taxpayer prepared the returns themselves, hired a tax preparer who recommended this type of strategy or hired a ‘shadow preparer’ who prepared their returns but then did not sign the returns. With shadow preparers, it can be very difficult for the taxpayer since the shadow preparer’s name is usually not contained on the tax return.
Is it Civil Tax Fraud?
This type of situation is typically a civil tax fraud matter. With civil tax fraud, the taxpayer may become subject to a 75% penalty in addition to other fines and interest due on the amount of tax that should have been paid from the outset had the falsified business not been integrated into the return, but it is still a civil matter.
Criminal Tax Evasion or Fraud
Sometimes, this type of tax violation can spill over into a criminal tax fraud matter — and even criminal tax evasion, a felony. A criminal tax matter is much more serious than a civil tax matter and therefore taxpayers who are in this type of situation want to be very careful when selecting the strategy to use to get into compliance. One common method for getting into compliance is the voluntary disclosure program.
Domestic Voluntary Disclosure (VDP)
Taxpayers who have falsified business expenses do not qualify for reasonable cause or QAR. Instead, they may want to consider making a voluntary disclosure. With the voluntary disclosure, the taxpayer voluntarily enters the IRS VDP ‘program,’ which is designed to assist taxpayers who may become subject to a criminal tax inquiry to resolve their tax situation before the IRS finds them first and then they play defense, which could lead to additional penalties. While the IRS does not guarantee that criminal attacks enforcement will be avoided. Oftentimes the IRS will forego any sort of criminal enforcement for taxpayers who voluntarily enter the voluntary disclosure program.
Golding & Golding: About Our Tax Law Firm
Before filing amended tax forms with the IRS, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of IRS disclosure matters.
Contact our firm today for assistance.