Cheating on Your Taxes: Why It’s a Bad Idea

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It’s income tax season and I don’t have to remind most of you that it is. But for some of you, it may never actually be “tax season” because you’re cheating on your taxes. If that sounds weird to you, take a minute to think about it.

Cheating on your taxes may be tempting, but it's a bad idea. If you're self-employed, it's easier to do, but you're also more likely to get caught.

Paying taxes are one of our least favorite things to do and our usual goal is to minimize and even avoid paying them in every possible way we can. In fact, I’m going to say this right now, if you thought you could get away with it, you’d probably not pay a penny in income taxes at all! But if that even crosses your mind for a second, let me give you some sage advice: Don’t ever cheat on your income taxes!

April 15th Isn’t Your Favorite Day?

This year you’re going to catch a slight break on doing your federal taxes. That’s because the due date, normally April 15th, has been pushed back to May 17th because of the workload at the IRS caused by the new stimulus checks and pandemic relief that began a few days ago. That means you have some extra time to figure it all out, but it doesn’t mean you are off the hook for paying taxes. Don’t get too excited about having an extra month. If you owe money, you still must pay up!

Most of Us Get Refunds, Don’t We?

Yes, it’s true that most Americans actually get a federal income tax refund when they file their returns, so congratulations to you…for being a real fool and getting that check.

IRS data shows that the vast majority of tax filers, 73.2% (nearly 96 million people) received refunds in 2019’s filing season and that was actually an increase from 73.1% during the 2018 tax filing season.

Financial experts (and even financial bloggers like me) advise people not to get huge refunds because it just means you have lent the federal government your money and the refund is simply getting your own money back with no interest after a whole year!

Tweak Your W-4 and Reach Perfection!

Every year I say the same thing and so do all of the smart financial advisors. That is to take a few minutes and “tweak” your W-4 form at work to adjust your withholding calculations. The W-4 dictates the amount of money deducted for taxes from a person’s paycheck, and your goal should be to try to make it so that you are “perfectly withheld”. That means you won’t get a refund or owe any money when you file your tax return. That’s the goal, but the numbers shows that about 75% of all U.S. filers are not being perfect.

While overpaying taxes and then getting a big check back after a year isn’t tax cheating, it is cheating yourself out of having that money available to you all year long in every paycheck you get. That money can be used for lots of positive things and earn more money such as in a retirement account or to help pay down debt and limit or eliminate interest charges. So again, here’s a reminder about you and your friend the W-4, pay him a visit now and make him your best friend.

What About the Self-Employed?

Each year surveys are done like the one I recently read from QuickBooks that reviews the self-employment trends in the country. Self-employment continues to grow and right now about 28% of all workers (44 million) have some kind of self-employment and about half of that, 14%, rely on self-employment as their primary income.

The pandemic and the recession that came along with it have caused many to begin a side gig. In other words, these workers created some sort of new job to help pay their bills and the most inspiring part is that most of these new businesses actually can grow when the economy falters.

But at the same time as the good news about new self-employment begins, the new tax cheater may also have been born!

32% Cheat!

Statistics show that in 2019, 32% of all self-employed workers admitted that they under-reported their taxable incomes. The methods are many and varied as to how the “cheating” actually occurs. Many self-employed people simply do not even bother to file a return at all! Some rationalize and say they don’t make enough to really concern themselves with paying while others claim that it’s all just too complicated and they simply can’t figure it all out.

According to the QuickBooks survey, of those over age 45, more than 10% reported no income, and under 25, about 7% reported none. The bottom line was that one in ten full-time self-employed workers reported 50% or less of their income for tax purposes.

The truth is that you can convince yourself of anything if you want to, but since the income is taxable and the taxes can be done with software programs that may even be free to use (such as on Credit Karma), excuses are just excuses. If you aren’t doing your taxes or doing them honestly, then you are cheating on your taxes…period!

Will the IRS Figure You Out?

Being audited by the IRS is something people do think about, and the horror stories you hear and read about it are sometimes pretty scary. If you don’t know a single thing about tax audits, turn your attention to our former president who is being audited right now and by the way, every year for as long as he’s been in business. Is there a good reason for that audit? We will eventually find out, won’t we?

Being audited by the IRS is common, especially for self-employed workers. The IRS really loves to audit self-employed people because they find so many “errors”.

This number is highest for part-time/occasional self-employed workers. And here’s the kicker: 50% of those who get audited had errors found when they were. Errors? Or were they deliberate tax cheaters? The IRS says that 19% of those with errors had major errors.

The penalties for making errors (or cheating) can vary from minor to dramatic. If you are cheating on your taxes, you can go to jail for years, ruin your reputation, and damage your entire life too if you are caught and convicted. Is that worth the risk to save you some cash?

Final Thoughts

I think that one of the reasons we all have some resentment about “paying up” on our tax bill is because we know that many never do it and it makes us feel like we should do that, too. I have heard and even said the one about Exxon and other large corporations who never seem to pay a dime in taxes and yet make billions in profits. The Trump evidence seems to fall right into that same category: large income and no or ridiculously low ($750) annual tax payments.

One thing we should all keep in mind is this: There are times when the federal government can help you and others with financial aid. Like when a flood or hurricane strikes an area or a pandemic like COVID-19 strikes. Much of the money that is being funneled back into the economy comes from the taxpayers and without those tax dollars paid into the system, there might be no payments made to help. The same is true for medical and food and other types of aid as well as the military. The list goes on and on. Besides just printing more money and increasing the national debt, taxes are theoretically the way we pay for government programs.

So think about all that as you do your taxes this season. I’m all for paying as little tax as you’re legally allowed, but cheating on your taxes is a bad idea.

Are you ready for tax season? Are you paying your fair share or are you thinking about using the “Trump plan”? Have you adjusted your W-4 yet so that you have a perfect tax season?

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