Yes, It’s Still a Bad Idea to Cheat on Your Taxes
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Here's your Money Briefing for Tuesday, April 8th. I'm Mariana Aspuru for The Wall Street Journal. It's been a turbulent few months for the IRS. Since President Trump took office, the agency has let go of thousands of workers and cut back on tax enforcement. And now, with tax day just one week away,

Americans are feeling the temptation to cut corners. The professionals said to me that they're hearing more about, oh, they'll never know. We don't have to tell them that. This is a big, tough year. They're not going to know. And then the professionals turn around and say, no, this has to be correct. We'll talk to WSJ reporter Laura Saunders about what could happen if you cheat, even just a little, on your tax return this year. That's after the break. ♪

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While the IRS may be shrinking, it's still far from toothless. Wall Street Journal tax reporter Laura Saunders joins me. Laura, what kinds of things do people usually try to fudge on their tax return?

It's a range. They might omit income, just leave it off. They might exaggerate deductions or credits and claim deductions and credits that they shouldn't. Or they might just not file altogether. And that'll get you in a world of trouble, which I want to get into. But since the Trump administration took office, thousands of IRS workers have been laid off and tax enforcement has been reduced. Right.

Does this mean that people feel like this is the year to cheat on their tax return? A lot of them seem to think that. And we talked to some preparers who said they're getting pushback. Do I really have to put that in? They're not looking anyway. You know, they'll never notice. And they said they're getting more of that this year. So what are some of the ways that the IRS...

knows that you cheated. Under the law, people who make payments to individuals very often have to also tell the IRS about those payments. Think about your W-2 form. It has what your employer pays you. It has a lot of other information. And

the IRS gets something like 250 million of those a year. That's a good place for it to start. But beyond that, there are all these 1099 forms. Did you get money from a brokerage account, dividends, interest, capital gains? Did you have gambling winnings? Did you get unemployment benefits? All these things are reported to the IRS as well as to you. And so the IRS has wonderful computers that can match these up.

And they send you a letter and say, what about that money? What about those gambling winnings that we didn't hear about from you? And the other thing is that perhaps you didn't file at all. Well, if they get one of those forms, they might say, where's the return? And that could be trouble.

So even with all of these slashes to its workforce, the IRS can still detect these crimes. How does it do that? Well, it matches with a computer, and it'll probably start that about the end of this year and go on for a year or two. Then the computer generates letters. What about this? What about that? We didn't hear about that. Come on, tell us about the other. How does the IRS detect?

penalize unpaid taxes? Oh, there are so many ways. And Congress has provided the IRS with a toolbox of penalties. The first thing that happens is interest. It's not a penalty per se, but it feels like a penalty. And right now, the interest rate on unpaid taxes is 7% a year. It used to only be 3%.

That's a lot more. And then there are penalties on top of that. Penalties for failure to file, penalties for failure to pay. Both of those can mount up to 25% very quickly.

Beyond that, one of the most famous ones that people really fear is it called a substantial understatement penalty. And that means if you understate your tax by a certain amount, you get a higher penalty. And if the income is severely understated, then they have six years to find you instead of three years to find you.

On top of that, if you've done something willfully fraudulent, the penalty on that is 75% of the tax you owe. And there is no statute of limitations. Wow. So it could just keep... It could haunt you forever.

I'm curious, do these penalties like stack up on top of each other? Yes, they absolutely do. Now, with failure to file and failure to pay, there's some offsets between them that bring them down just a little bit. But generally, they just stack up. And then the last penalty, which is kind of wild, is the one for frivolous tax returns. Now, that's where the tax protesters come in. Say that you submitted a tax return that said that under the Constitution, nobody should have to pay income tax.

That could be liable for a frivolous tax penalty, $5,000. Or what if you took your paper tax return and you colored it and then sent it in that way, but you didn't put any information or numbers or anything like that on it? That would also be a candidate for a frivolous tax penalty. So these penalties have gotten more...

more expensive, meaning this really isn't the time to mess around? That's right. The big thing that's gotten it more expensive is the interest rates. And they, of course, the interest rates run on the penalties as well as the tax. So it's a pretty serious business now. And you spoke to some tax professionals who have clients that have tried to push the envelope this year.

What did they say about it? Absolutely. The professionals said to me that they're hearing more about, oh, they'll never know. We don't have to tell them that. This is a big, tough year. They're not going to know. And then the professionals turn around and say, no, this has to be correct. You know, was that really a business meal?

Or was it just a pleasure meal? And one thing that's important to know here is that tax professionals have to ascertain that the information on return is correct. And if it's not, they could lose their licenses. So that gives them a really good reason to push back against clients.

And that applies to about half of taxpayers. The other half do them themselves, maybe with commercial software. There are not as many restraints on them. Yeah. And you write in your story, which can be found in our show notes, that nearly 80 million Americans prepare their own tax returns. What do self-filers need to know if they're tempted to test the IRS's limits this year? Well, they need to know all the things we just talked about.

all the ways they have to find you and all the penalties they could impose on you. A former commissioner said that he tells his clients that when you dance with a bear, you dance till the bear gets tired. That means if you attract attention from the IRS, it may go on and on and on. And that's a good reason not to attract their attention. And there's an even better reason

It is that you'll be able to sleep well at night. Yeah. You don't want to be haunted by what you did wrong. Which is priceless. Yes. That's WSJ reporter Laura Saunders, and that's it for your Money Briefing. This episode was produced by me with supervising producer Melanie Roy. I'm Mariana Asputu for The Wall Street Journal. Thanks for listening.