Over Reporting Your Income? IRS May Find Out And There Could Be Consequences.

Just read an interesting Tax Court opinion (Cadet, TC Summ. OP. 2015-39) about over reported income. The taxpayer, who was called ‘a low income filer with very little wage income’, claimed a profit from a side-business of $17k from selling items at a flea market. The taxpayer would have been paid $2,100 in self-employment tax, but the extra income would have resulted in about $8,000 total from the child tax credit plus an increased earned income credit.

Normally a tax return is first reviewed by the IRS computer system and, if needed, by reviewers. In this case, the computers noted the ‘excessive’ income based on the taxpayer’s history and the computers froze the return. During a review, the taxpayer couldn’t substantiate most of the profit (not enough deposits into bank accounts I’m guessing) so the IRS only allowed what was substantiated and only gave $700 in tax credits.

What’s interesting to me is I’ve heard of the IRS computers looking for under reported income, but not over reported income.

Something that wasn’t mentioned is if the IRS charged the taxpayer a civil penalty (usually $5,000) for filing a frivolous tax return – in my mind, it would have been warranted! That’s the main penalty for filing a false return.