Why in the world would anyone of sound mind and body declare more income than they actually earned? He or she would owe more tax, so there’s no reason to do this, right?
No, there are actually two reasons people do this. They’re both part of the Bozo contingent, and I strongly advise you not to follow their lead, but here goes:
The first (less common) reason is to qualify for a loan (typically a mortgage). Let’s say you found your dream home, but you need to show income of $100,000 a year…but you only earned $90,000. Simple solution: Declare an additional $10,000 of income! Now you qualify, and next year you plan on cheating on your taxes by that $10,000. Of course, the fact that you committed a felony by lying on your loan application doesn’t concern you. And the IRS is unlikely to come after you for the extra income; after all, if you do get audited in some future year you will simply admit the error. Some who practice this simply file an amended return a year or so later. You own the home, you’re making mortgage payments, so no one’s the wiser, right? (We’ll continue to ignore that felony you committed.)
The more common reason is the Earned Income Credit. This welfare program is part of the Tax Code. Let’s say you earn nothing; you’re not eligible for it. But if you have some income (but not huge income), you’re eligible for “free money.” (And we’ll throw in a phony child or two or nineteen so you can get the Child Tax Credit and, voila, you have even more “free money.”) Of course it’s not free—it comes out of our tax dollars. And you’re committing a crime (lying on your tax return). However, given how the Tax Code works and the monetary reasons for individuals to seek the Earned Income Credit, the Bozo contingent looks at it as “free money.”
(That’s the reason Congress requires tax professionals to conduct a mandatory interview for people who are claiming this credit. There are penalties on tax professionals who evade this requirement. Of course, if you’re running an Earned Income Credit fraud program, you’re probably more than willing to lie on the tax professional’s mandatory questionnaire.)
A tax return is supposed to show the exact amount of income you made: no more, no less. If you get caught adding income that didn’t exist to your return for one of the two reasons I’ve highlighted you’ve committed at least one crime. I’d like Congress to end Tax Code welfare (end the Earned Income Credit) but that’s not going to happen. But if you get caught adding phony income (especially if you’re a tax professional running an EIC fraud mill) you can be sent to a very real prison.
That’s the last of our Bozo Tax Tips for the 2017 Tax Season. I’ll be back in about one week with normal blog content.