Inflating income and expenses
Most tax cheats report less income than they make, so their tax liability will be less. But in some cases, a taxpayer needs more money to get a tax break's maximum benefit.
The IRS says it regularly sees fraudulent income inflating by individuals seeking a refundable tax credit, such as the earned income tax credit, for which they otherwise don't qualify.
Credits prompt such unscrupulous acts because they are better tax breaks than deductions. A deduction lowers taxable income, while a credit lowers the actual tax bill dollar-for-dollar. Refundable credits, as the name indicates, allows filers who don't owe tax to get a refund.
Some taxpayers also exaggerate expenses used to claim refundable credits. The American opportunity education credit, for example, pays for taxpayer higher education expenses. If a filer has enough schooling costs, he or she might be able to get more of the credit and even a possible refund.
These false claims, either of more income or larger expenses, could have serious repercussions. In addition to facing repayment of erroneous refunds, along with interest and penalties, a taxpayer caught making false claims could face criminal prosecution.