The IRS warns taxpayers not to overstate their tax deductions in this year’s IRS Dirty Dozen Tax Scams list.
Every year there are taxpayers who try to reduce their tax bill by overstating tax deductions or claiming tax credits to which they are not entitled. Note that any illegal attempt to reduce your tax bill by making false statements, failing to pay tax due, and/or filing a fraudulent return, etc. may subject you to prosecution for tax fraud. Tax evasion is punishable by fines and even imprisonment.
Following is a brief overview of some of the deductions that you are permitted to take on your tax return. You should review these with a qualified accountant before filing.
Deducting charitable contributions
To get a deduction for a charitable contribution, the organization receiving your gift must qualify as one of the following:
- A church, synagogue, temple, mosque, or other religious organization
- A nonprofit school or hospital
- A war veterans group
- A federal, state or local government (only if your gift is for public purposes such as to maintain a public park or reduce a debt held by the public)
- Any other organization that qualifies as tax exempt under Internal Revenue Code Section 501(c)(3)
If you volunteer for a qualifying charity, you may also receive a charitable deduction for any out-of-pocket expenses you incur in carrying out your work for that organization.
Medical expenses are deductible to the extent they exceed 7.5% of your gross adjusted income. Deductible medical expenses include, but are not limited to:
- Medical services provided by a physician, surgeon, dentist, or other medical practitioner
- Costs for diagnosis, treatment, mitigation, cure, or prevention of a disease
- Costs of needed equipment, supplies, and diagnostic devices
- Medical insurance premiums
- Transportation to and from medical facilities for treatment
- Qualified long-term care insurance premiums
You may only deduct medical expenses to treat a specific physical or mental disability or illness, not if the expense is intended to improve your overall health (such as vitamins).
You can only deduct medical expenses paid in the current year, for care received during the current year. For expenses incurred in previous years, you’ll need to file an amended return. For future care, you’ll need to wait to make the deduction.
Claiming business expenses
The only deductible business expenses are those that are ordinary (common and accepted) and necessary (helpful and appropriate) for your trade and business. Making up or “creatively” enhancing your business expense deductions, otherwise known as “padding deductions,” is a serious and punishable offense.
Falsely claiming tax credits
The IRS is aware that many taxpayers are tempted by the refunds they may receive through credits such as the Earned Income Tax Credit and Child Tax Credit, and is keeping a close eye on individuals who claim them. If you aren’t entitled to a particular tax benefit, don’t claim it.
IRS penalties for overstating deductions
The best way to avoid an audit and tax penalties is to consistently file accurate tax returns. The IRS penalties for filing a false tax return are significant –penalties range from 20% of the amount owed for filing an erroneous claim to 75% if the IRS determines that your underpayment was the result of tax fraud.