Getting around taxes has been an American pastime since the 1773 Boston Tea Party. Image from Wikimedia Commons.

The amount of the average tax refund has been steadily increasing over the years, and so is the number of cases of tax fraud. The Internal Revenue Service has seen a rise in the number of fraudulent deductions taken on income tax returns. More people are trying to catch the government napping to scare up some extra cash.

Internal Revenue Service not amused with crazy deductions

Most Americans hate taxes, and finding ways to hoodwink, trick and blatantly lie to the tax man is practically a national pastime. The number of fraudulent tax returns, according to CNN, has skyrocketed since last year. The Internal Revenue Service received 335,341 tax returns that falsely claimed nearly $1.9 billion in deductions. That figure was a 181 percent increase over the number of similar returns last year, when the IRS received 119,484 returns that incorrectly claimed deductions totaling $721 million. However, not all of these returns were brazen acts of fraud, and the term “fraud” can be somewhat misleading.

False deductions aim to claim more money

The Internal Revenue Service investigated 230 people for questionable returns for Fiscal Year 2008 and 504 people for Fiscal Year 2010, according to the Internal Revenue Service website. In 2008, only 155 recommendations to prosecute were made and 301 were made in 2010. Those figures only include cases of bad deductions. The IRS made 1,507 recommendations for prosecution in total during 2010, according to USA Today. The reason people submit bad deductions on tax forms is simple — more deductions means more money. The average tax refund, according to the Wall Street Journal, was $3,003 for 2010, almost double the $1,698 average tax refund in 1999. The number of bad deductions in 2008 compared to 2010 suggests people are trying to claim greater deductions during lean years.

Houses, cars and kids most common bad deductions

The most common falsely or mistakenly taken deductions were for real estate, motor vehicles or children. The Treasury Inspector General for Tax Administration released a report that asserts the most problematic deductions were the Adoption Credit, the Qualified Motor Vehicle Deduction, the Non-Business Energy Property Credit, the Plug-in Electric Drive Motor Vehicle Credit and the First Time Homebuyer Credit. The Qualified Motor Vehicle Deduction and First Time Homebuyer credits caused the most trouble; the Treasury found that 218,069 people claimed $318 million in QMV deductions, but those people would have had to put off paying any sales tax or excise tax for 2009 and 2010. The First Time Homebuyer credit, according to the Los Angeles Times, paid out an estimated $513 million to people who didn’t necessarily qualify for it. At least $326 million was credited to 47,000 people who had previously owned homes.

Sources

CNN

Internal Revenue Service enforcement statistics

USA Today

Wall Street Journal

Los Angeles Times

Treasury Inspector General for Tax Administration

Most people would rather get locked in the stocks than deal with an IRS audit, but the odds of getting audited are less than 1 percent for the typical person. Image from Wikimedia Commons.

Everyone dreads getting a notice of a tax audit from the Internal Revenue Service. There are few documents that cause as much terror as an audit notice. However, the odds of being audited are very low.

78 of 100 audits take place via correspondence

According to a recent post on CNN, up to 78 percent of tax audits in the year 2009 took place via mail correspondence. The article also clarified that “22 percent took place in person.” That means fewer Internal Revenue Service agents are being dispatched out to conduct audits. Performing audits via correspondence is cost effective for the IRS, and it is happening more frequently because the IRS has already had to deal with diminishing budgets and is facing a further $600 million in cuts from its budget. A Taxpayers Advocacy Service survey cited in the CNN piece revealed, however, that more people would prefer an audit in person because the legalese is difficult to understand. However, normal taxpayers should fear not, because only 1.6 million people were audited in 2009. That’s less than 1 percent of the U.S. population.

Rich audited more often

Those most likely to be audited by the IRS are the wealthy. According to Forbes, those with an income of $200,000 or more per year stand a 2.7 percent chance of an audit, and the Wall Street Journal reports that those making $10 million or more stood an 18 percent chance of being audited. Forbes and the Wall Street Journal noted that the rate at which the wealthy were being audited was increasing. Though that is awful news for Donald Trump, the rest of us can rest easy knowing there is a 1 percent or less chance of being audited.

If an audit does come around

Beware of any phone calls or emails concerning an IRS audit; those are scams. The Internal Revenue Service only communicates in an official capacity by mail. According to Investopedia, should always keep at least the last three years of income tax returns and related records on hand. Most audits happen for a reason and are triggered by red flags in a person’s tax file. The IRS has a lot of people and a lot of data to keep track of and won’t take the time to perform an audit unless it thinks it should. The most common penalties are 20 percent and 75 percent of the amount of tax that should have been paid.

Sources

CNN

Forbes

Wall Street Journal

Investopedia

Saving money is not as easy as it looks. Image from flikr.com

The government has always pushed for people to put money into personal savings. Now President Barack Obama has created ways that will actually make saving easier for workers.

Just like Personal Money store makes online payday loans easier, Obama has come up with these three ways for individuals to save money: auto-enrollment in retirement plans, issuing tax returns as savings bonds and putting unused sick or vacation days into 401k plans.

1. Auto-enrollment in retirement plans

This will not make retirement plans mandatory for employees, it will simply make it easier for employers to enroll their employees in the retirement plans. CNN Money explains:

To make it easier for smaller and medium-sized employers to automatically enroll workers into retirement plans, the administration will clear up some bureaucratic paper-work hurdles for employers to offer that option.

2. Tax returns as savings bonds

This one is pretty simple. Recently the government made it possible for tax payers to get their refunds deposited directly into their bank accounts rather than sending a paper check. Similarly, now tax payers will have the option of having their tax return issued in the form of government savings bonds.

Automatically converting your tax returns into government savings bonds means that your money will be automatically saved and it will earn a higher interest rate than it would at a normal bank. The longer you leave your money alone, the more you will make off of it.

3. Saving sick and vacation days

Many people do not use up their sick days or vacation days at work. For the vast majority, that means that they are wasted. The government now will make it easier for employers to convert their employees’ unused sick or vacation days into dollars invested in their 401k plans. Again, this isn’t a mandatory thing at all. Employers and employees have the option of whether they want to do it or not, it simply will be easier.

Why the extreme measures?

Before you start spouting off about big government and personal freedom, remember that all of these things are completely optional. No one — not employers or employees — is require to participate. However, the benefits of personal savings in relation to the economy are obvious to everyone, so as part of the effort to turn the recession around, the White House has come up with these ways to encourage and facilitate personal savings. Just in case you’re in doubt about whether this help is necessary, here are some statistics from CNN Money:

Even among those with savings in the bank, the nest egg is relatively lean. Of workers 55 years or older, about half have less than $50,000 in savings, excluding their homes and pensions, according to the Employee Benefit Research Institute.

Some of these measures will be very lucrative for people. Unfortunately, these only help people who have jobs and qualify for tax returns. Saving money and investing wisely is very important, and I for one am glad to see that the government isn’t just talking about the fact that people should save money, but is actually taking steps to make it easier. I hope we will see more measures like this in the future, and that we can find a way to help people who don’t have 401ks and tax returns.