Excessive Claims for Business CreditsA tax credit is a legitimate and effective way for a business to lower their tax liability. As a small business owner, it’s wise to claim any credit for which you are eligible. However, claiming excessive tax credits is a quick way to land yourself in trouble with the IRS. Read on to learn all about tax credits, as well as common tax credit scams used to defraud the IRS.
- What is a Tax Credit?
- Fraudulent Tax Credits
- How to Avoid Wrongly Claiming Tax Credits
- Wrongly Claimed Business Tax Credits
What is a Tax Credit?There are certain expenses that businesses incur that are designated by the government as beneficial to communities. In order to incentivize small businesses to incur these expenses, the government and the IRS allow small businesses to deduct the cost of the expense from their tax liability. This is known as a tax credit. Unlike tax deductions, which reduce taxable incomes tax credits are subtracted directly from your tax liability. This makes them an incredibly effective tool at lowering your tax payments. Some types of tax credits, known as refundable tax credits, can be claimed even if the credit is greater than your tax liability. In this scenario, the IRS would end up paying you to claim the credit, rather than you paying them.
Fraudulent Tax CreditsAny tax credit that is claimed falsely or incorrectly is considered a fraudulent tax credit. There are many ways that fraudsters claim illegal tax credits.
Fuel Tax Credit ScamsIn order to incentivise the production and use of fuel from renewable resources, the IRS offers the Credit for Federal Tax Paid on Fuels, known as the Fuel Tax Credit. This credit is available to businesses who purchase fuel for use in agriculture, farming, boats, buses, and off-highway travel. If you’re unsure if you qualify, take a look at the IRS Fuel Tax Credit Guidance.
Fuel Tax Credit PenaltiesAccording to the IRS, the Fuel Tax Credit is one of the most commonly abused tax credits by small businesses. In the event that this credit is claimed frivolously, a business may be subject to a $5,000 penalty or even criminal prosecution.
Research Credit ScamsThe Research and Development Tax Credit is an important element of the tax code. It incentivises businesses to participate in experimentation and research. After all, what would America be without its incredible technological innovations? Businesses may claim this credit if they participate in research that improves their main product or process. Said research must be clearly documented as aimed to achieve a desired result and all elements of the research and development must be relevant to the business. Qualified research expenses do not include expenses without a proven nexus, or connection, between the claimed expenses and the qualified research.
Research Credit Fraud PenaltiesIn the event that the IRS determines a research credit was excessively or falsely claimed, they may assess a penalty of 20% of the credit amount, in addition to requiring the business to pay the full credit amount. They may also assess interest on the credit amount.
How to Avoid Wrongly Claiming Tax CreditsThe simple solution would be to file your own taxes and not lie; however, that’s much easier said than done. Most small business owners are too busy working to find the time to file their own taxes. But remember: this isn’t an excuse to become negligent or complacent; hiring a qualified tax professional could be the difference between life and death for your business. When using a third party for filing tax returns, make sure to get copies of everything that goes to the IRS. Your tax representative might get annoyed, but it’s better than receiving a letter from the IRS notifying you of penalties or an audit. Go through your returns and look for tax credit claims that shouldn’t be there. If you aren’t careful, you could be asking yourself, “How many years can tax credits be investigated?”
Tax Fraud Statute of LimitationsDepending on the magnitude of your tax fraud, there are a few different statutes of limitations in place.
- 3 Years: For most returns, the IRS has a 3 year statute of limitations from the due date. Generally, that would mean 3 years starting April 15th of that tax year. For those who receive a tax extension, that would mean 3 years starting October 15th of that tax year. In the event that you file your taxes late, your 3-year statute of limitations still begins on the day that your taxes were due.
- 6 Years: In the event that you’ve made a “substantial understatement of your income”, meaning you’ve underreported by 25% or more, the IRS has 6 years from your tax due date to audit you.