6

When filing their USA Federal taxes, someone might want to state more income than they actually had, for reasons. This would result in paying more taxes than the person actually owes.

Specifically, this unreal income would be reported on 1040 Schedule C, line 1 or line 6.

Are there any laws or IRS regulations which prohibit that? Since the "error" (actually, deception) is in the government's favor, would there be any penalty other than $0?

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  • Note that this question is also relevant to anyone unable to get healthcare due to the "Medicaid gap". – R.. GitHub STOP HELPING ICE Jan 26 '18 at 21:44
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26 USC 7206:

Any person who— (1) Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter [...] shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution.

("Return", as defined in 26 USC 6696, includes an income tax return.)

This clause notably doesn't care whose favor the falsification was in, or why you did it. You knew it wasn't true and you put it on your tax return anyway, and you declared under penalty of perjury that it was true and correct. That's a felony, end of story.

(Paragraph (4) of this section covers some other types of fraud done "with intent to evade" taxes, but that restriction does not apply to paragraph (1).)

The likelihood of actually being prosecuted in such an instance is beyond the scope of this site. But in the given case, the falsification really isn't in the government's favor. The purpose was to become eligible to collect government social security benefits, which you otherwise wouldn't be eligible for. Presumably you would only bother to do this if you thought you'd collect more in benefits than you pay in extra tax, which means the government loses in the long run.

This also eliminates any chance you'd have of claiming the falsification was "immaterial": it affected your eligibility for social security, and you knew that - it was the whole reason you did it.

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    Would a followup question be appropriate? Suppose someone does the legwork of creating genuine income, but has costs of goods sold. Is she also legally obliged to reduce her income by reporting those costs on line 4, or is there a universal right to decline to take a deduction you're entitled to? Once I had to sue IRS to let me under-deduct "state tax paid" on Sched. A line 5. IRS counsel was like "Why is this a lawsuit? It's fine, write the judge's order." – Harper - Reinstate Monica Jan 26 '18 at 5:37
  • @Harper: That should maybe be asked as a separate question. My guess is that it would come down to whether the implicit question on the form is "How much did you pay in taxes?" or "Of what you paid in taxes, how much would you like to deduct?" – Nate Eldredge Jan 26 '18 at 13:48
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    In practice, I am more skeptical than Nate that any action would be taken or that there would even be an audit. If anyone investigated, it would likely be the financial crimes department of the Treasury and they would investigate it as money laundering rather than primarily as tax fraud. – ohwilleke Jan 26 '18 at 17:55

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