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How to Cheat on Your Taxes

March 2nd, 2010 by Filed under: Tax Tips

cheat-taxesWell, I’m not actually going to tell you how to cheat on your taxes, but I will tell you the most common ways used to cheat on taxes and why you will likely get caught if you attempt to use any of these methods. The IRS system is getting more and more efficient at catching tax cheats each year. There is a chance you can get away, but statistically speaking the risk vs. the reward does not pay off. Many times individuals underestimate the IRS collection and matching system and end up in some SERIOUS trouble with very steep Federal tax penalties.

Common Cheating Methods

Method: Underreporting Income

  • How it Works: If you do not report all the income you made you will pay a drastically lower tax amount. For about every $100 you underreport, you will save about $25-$30 in tax money that you have to pay. Seems pretty simple huh?
  • Why You’ll Be Caught: Anyone who gets a W-2 or a 1099 they have to realize that a copy goes to you and a copy is also being sent to the IRS. The IRS actually has a complex matching system that is called the Information Returns Processing System. This system matches up what you reported vs. what you should have reported (as provided by whoever paid you). Yes, sometimes you do receive cash and you do not receive a W-2, but you have to realize that the IRS systems know how much it costs to be YOU, by comparing you to the averages of other people who have the same occupation as you, live in the same location etc. If your amounts differ much more than theirs, you can expect to get audited and caught.

Method: Claiming Some Extra Children

  • How it Works: For each child you claim you can receive a $1,000 tax credit. It makes sense, the IRS wants people to have more money to take proper care of their children and they are willing to give a very solid tax credit for it, so why not claim as many children as you can.
  • Why You’ll Be Caught: Well now the IRS requires that each child that is claimed has a legitimate social security number. A child cannot be claimed more than once because the IRS will catch this duplicate tax credit in their tax return matching process. Many people each year try claiming children that are not theirs and do get caught.

Method: Round Up or Down to Your Benefit

  • How it Works: Just round up to the closest thousand to get that few extra hundred dollars of benefit on that write off. Rounding will also make for easier calculations since you won’t have to deal with decimals.
  • Why You’ll Be Caught: Round numbers is one of the biggest IRS red flags. The IRS system does statistical analysis on all numbers and knows it is highly unlikely to receive rounded numbers as income or in expenses, so you can expect them to check up on those numbers pretty quickly with an IRS audit.

Method: Launder Money Overseas

  • How it Works: It is a fact that when you make certain financial transactions in the US that the IRS is watching and even if you wanted to hide these transactions there is no way to. If you move money offshore where the US government does have the legal ability to be watching over each financial transaction that is made, then it can become easy to avoid some hefty taxes.
  • Why You’ll Be Caught: The IRS has partnered with many state agencies to crack down on transactions that go overseas. If you ship off money to an overseas account, it is likely the IRS will now about it and they will investigate. The IRS has been cracking down hard on these types of transactions and not going light on the penalties when they do catch individuals doing this.

It is true that many people do get away with cheating on their taxes each year but they are taking some serious risks. If you look at the at taking these types of risks from an investors standpoint, the risk vs. the reward is too high for a smart investor to even consider trying to cheat on their taxes. If you are looking to shelter your money from taxes you should look into the legal forms of tax shelters and you can significantly reduce your taxable income each year.


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