Many Americans have not noticed the paragraph above their signature line on the 1040 and other IRS and state tax forms, which notifies the taxpayer that they signed their tax return “under the penalties of perjury” and that they had examined the return and underlying schedules.
The “Sign Here” block of the IRS Form 1040 for 2023 states, in part: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”
Tax returns for many U.S. taxpayers have become much more complex, especially for those who have foreign financial accounts and investments, large partnerships, S Corporation filers, high-wage earners, and business owners. The free and inexpensive online software solutions have missed critical forms, declarations, and other information required by the IRS in previous years, often allowing the taxpayer to skip past sections they may not understand or wish to go through. This exposes U.S. taxpayers to unnecessary risk, and if your tax return has been “fudged” a bit, the penalties of perjury open the door to far more serious consequences.
The FBAR form (FinCEN Form 114) is one example of this. If the aggregated total of your foreign financial accounts exceeds more than $10,000 at any point in a tax year – even if it is for a day – you must submit the FBAR and associated schedules. Failing to include every account you hold a beneficial interest in is a serious matter.
For the past several years, the IRS has been receiving detailed information from international banks, investment and financial accounts, and sovereign tax authorities around the world. This information includes account balances throughout the year, transactions, and income, all associated with your unique U.S. taxpayer identification number (TIN), passport number, or federal tax I.D.
The IRS’s challenge used to be a workforce issue. They didn’t have the personnel to comb through this massive trove of incoming electronic information. That equation has significantly changed, and U.S. taxpayers must realize the genuine risks they now face.
The IRS has invested the $80 billion it received from Congress two years ago in state-of-the-art large-scale computer systems and Artificial Intelligence (AI). You may have been able to “fly under the radar” of the IRS for the past several years due to its inability to discover your offshore holdings and activities.
Today, the IRS has the technology and AI to efficiently comb through all of that information and compare it to the numbers reported on the tax returns of each U.S. taxpayer. When those numbers don’t add up, the next step will be an investigation and/or a full-scale audit.
Once the investigation or audit begins, the taxpayer’s options to come into compliance end. The result will include large financial sums for back taxes, penalties, fines, and interest, and the genuine possibility of criminal charges for tax evasion. Are you also prepared to face “the penalties of perjury?”
It’s no longer a matter of “if,” it’s a matter of “when.” The IRS now has the systems and the AI applications to tie all the information together and target U.S. taxpayers who have unreported or under-reported income here in the United States and worldwide.
If you’ve understated anything or omitted any accounts or transactional details, even those as minor as interest, your return is flagged for investigation and an IRS audit.
S Corporation returns must perform a fairly sophisticated calculation of “basis,” which must be updated every year. IRS revenue agents often analyze business owners and LLC members to search for excessive deductions and under-reporting.
Tax agencies no longer have to invest human assets to sort through electronic information and tie it back to an individual or business tax return. Agency personnel identify behavior patterns and train the AI applications to search for those patterns and identify any tax return that fits the pattern.
For example, in the past few weeks, the IRS announced the formation of a new “Associate Office” that will solely target S-corporations, trusts, estates, partnerships, and passthrough entities. The agency identified a single pattern of behavior that is believed to result in the loss of billions in tax revenues. Sophisticated schemes can no longer overwhelm tax agencies or hide income anywhere in the world.
Many U.S. taxpayers believed they were “too small” for a tax agency to find, let alone investigate and audit. AI is able to easily sort through large volumes of electronic information while comparing it to the returns of the associated Taxpayer Identification Number (TIN) to identify targets for investigation and audit.
This is a time to open one’s eyes, face the reality of the approaching storm, and prepare. There are several options for U.S. taxpayers to come into compliance with unreported and under-reported income, accounts, and assets at home and abroad.
The old saying of “you can pay me now, or you can pay me later,” has become “you can pay me a little bit now, or you can prepare to have a large sum taken from you in the near future.”
It’s a simple question: Do you really believe you can continue to hide your accounts and activities?
You’ve signed every tax return submitted “under the penalties of perjury.”
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
