Are You Committing These Financial Illegalities?

Some people make money moves that may get them in trouble.

Provided by Frederick Saide, Ph.D.

Americans do many things with their money and invested assets, most of them on the up and up. There are exceptions, however – cases in which people unintentionally break the law, flirt with illegal behavior, or pay federal tax penalties for their indiscretions. Here are a few examples, from the cavalier to the ridiculous.

Rounding up income on a mortgage application. Maybe a prospective homebuyer (or homeowner looking to refinance) anticipates a raise or bonus later this year. Or his or her spouse does. Maybe they should “err on the high side” in stating their incomes. Maybe it would help them. Come to think of it, maybe they should “err on the low side” in stating their debt.  

The days of “liar loans” are gone, but this kind of thing is still perilous. These are mortgage industry basics; lenders routinely examine them. While huge numbers of Americans arguably committed some degree of mortgage fraud in the 2000s and went unpunished, that fact should not lead anyone to be so casual about basic facts of their financial life. More than rejection of a mortgage app could result.

Signing a check in someone else’s name. This is illegal in most states; this is forgery. What if an elder can no longer sign a check, and a relative attempts to mimic their signature or just writes that elder’s name in his or her own handwriting style? What if Mom or Dad does the same sort of thing on a check from their son or daughter’s checking account? It still amounts to forgery.¹

Overestimating non-cash donations to a charity or non-profit. Someone donates a minivan to a food bank. In the donor’s mind, that minivan is worth $6,500. That was what they paid for it used. Well, some time has passed since then. The Blue Book value (fair market value) of said minivan turns out to be substantially less now – but the donor reports its value to the IRS at $6,500. If the IRS disagrees (and it very well might, assuming decent documentation is available), the donor might be in for a tax penalty.

Forgetting to report 100% of income. Some people intentionally misstate their incomes to the IRS, and other people just neglect to report miscellaneous forms of income like royalties, freelancer payments, dividends, prizes, and so on.  A penalty may await them.

The chances of forgetting the odd W-2 or 1099 form rise when a taxpayer moves during a year or works several jobs. Tips must also be taken into account when filing a federal tax return; the IRS provides Form 4137 to help individuals determine any additional Social Security and Medicare taxes they may owe as a result of tips and wages not reported on an individual’s W-2 statement.²

Years back, the federal government actually studied underreported income by occupation. Restaurateurs, clothing store owners and auto dealers were most prone to this.³

Forgetting estimated tax payments. If an individual’s freelance income is significant enough that he or she expects to pay more than $1,000 in taxes from such activity, then estimated tax payments must be made quarterly to the IRS. Penalties may be triggered if quarterly deadlines are ignored.²

Deducting too much in business-linked expenses. This can also invite an IRS penalty, and business owners, executives, and solopreneurs can fall prey to this common tendency. The IRS finds that less than 7% of such deductions are intentionally overstated or made up.³

Ruining money. Making U.S. paper currency or hard currency unusable is actually a federal crime. If someone intentionally or unintentionally defaces, perforates, glues together or mutilates bills or coins to the degree that they can no longer be used in commerce, it is a violation of federal law.¹

If you are guilty of negligence, it sure beats being guilty of fraud. The common IRS penalty for a reporting mistake on your 1040 form is 20% of the unreported amount. Contrast that with the 75% civil penalty for tax fraud. Of course, negligence can be viewed as fraud – and that alone should make people think twice about inaccurately stating details of their personal finances.³

Fred Saide may be reached at 908-791-3831 or freds@moneymattersusa.guru

www.wealthensure.com

This material was prepared by a third party,  and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - bankrate.com/finance/personal-finance/6-money-habits-that-are-illegal-1.aspx [5/21/15]

2 - nerdwallet.com/blog/banking-faqs/3-ways-people-become-tax-cheats/ [4/10/15]

3 - nolo.com/legal-encyclopedia/negligence-versus-tax-fraud-irs-difference-29962.html [7/23/15]