Fudging on deductions: IRS warns of possible penalties

"Fudge" is a peculiar word. As a noun, it refers to a soft, creamy candy or, more generally, to foolish nonsense. As a verb, it means to fake or falsify something, or to bend the rules.

When filing taxes, what does it mean to fudge and what can happen if you do?

Fudging is hardly a technical term. But generally it means to overstate deductions, inflate business expenses or use credits you aren't entitled to.

Of course the motivation for behaviors such as these depends on the situation. Someone who made a good faith mistake on the amount of deductible business expenses is hardly intending to commit tax fraud.

The IRS has become increasingly concerned, however, about padded or improperly taken deductions or credits. Refundable tax credits, particularly have the Earned Income Tax Credit and the Child Tax Credit, have come under particular scrutiny.

As a result, the IRS listed false or padded deductions on its annual "Dirty Dozen" list of tax scams for 2017. The IRS has also warned that its automated systems are becoming more efficient at detecting padded deductions.

What are the possible consequences of this for a taxpayer?

For taxpayers who take substantial deductions, such as for large charitable contributions, the increased IRS concern about padded deductions can make an audit more likely.

If the IRS determines that your return was incorrect, there can also be substantial penalties. For example, the penalty for filing an erroneous claim for a refund or credit is one-fifth of the disallowed amount. And if there was an underpayment of tax due to fraud, the penalty is 75 percent of the amount of tax owed.

Criminal prosecution is also possible in cases of willful tax evasion or other wrongdoing.

To be sure, an audit may turn up nothing and criminal charges may not stick. But it's important to be aware that fudging on your taxes can lead to trouble with the IRS.

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