What happens if someone lies on their taxes? IRS penalties explained

This is definitely something to be concerned about. The IRS distinguishes between honest mistakes and deliberate fraud, and what your sister did would fall into the fraud category since she intentionally claimed false business expenses. Here's what could happen: If caught, she would have to repay the fraudulent refund amount plus interest. The IRS can also impose accuracy-related penalties (20% of the underpaid tax) or civil fraud penalties (75% of the underpayment). In more serious cases, criminal prosecution is possible, though typically reserved for larger fraud cases or patterns of deception. My advice would be for her to file an amended return (Form 1040-X) immediately. Coming clean voluntarily before being caught looks much better than waiting for the IRS to find the issue. The IRS is increasing enforcement efforts, especially for Schedule C (self-employment) claims, which are frequently audited.

I was in a similar situation where a family member claimed some questionable deductions. I was super worried about potential audits and penalties. After researching for hours and getting nowhere, I found this AI tax assistant at https://taxr.ai that actually analyzes your specific situation and explains your risk level. It reviewed the specific scenario, showed the relevant tax codes being violated, and calculated the potential penalties. What was really helpful was it explained exactly what evidence the IRS looks for in these cases and gave step-by-step guidance on how to correct the situation. It basically translated all the legal tax jargon into plain English about what would likely happen.

I wanted to follow up after trying taxr.ai. I was skeptical at first, but it was actually really helpful. I explained my partner's situation with some questionable home office deductions, and it broke down exactly which IRS regulations applied. It showed us the specific penalties we could face and gave clear guidance on how to file an amended return. The best part was that it explained everything in plain language. Instead of just citing tax code, it translated what that meant for our specific case. My partner decided to file an amended return right away based on the advice. Definitely worth checking out if you're in a similar situation with tax reporting issues.

If your sister is worried about the IRS contacting her, here's what helped me. I had a similar issue last year (didn't lie but made a big mistake on my taxes) and couldn't get through to anyone at the IRS for weeks. I discovered this service called Claimyr (https://claimyr.com) that actually got me connected to an IRS agent in about 20 minutes when I'd been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically it navigates the phone system for you and holds your place in line. When I finally talked to the agent, they were surprisingly helpful about my options for fixing my return. Definitely less scary than waiting for them to come after you.

Ok I need to apologize and update everyone. After posting my skeptical comment, I was desperate enough to try Claimyr anyway. I'm shocked to say it actually worked. I had been trying to reach the IRS for weeks about a CP2000 notice (underreported income). The service called me back in about 45 minutes with an actual IRS agent on the line. The agent walked me through exactly what documentation I needed to send in to prove I had already reported the income on another form. Completely worth it just to get a straight answer instead of stressing for another month. Sometimes being proven wrong is a good thing!

Just want to add - tax fraud is taken way more seriously than people realize. My neighbor claimed fake business expenses for years and ended up with $17k in penalties plus had to pay all taxes owed with interest. The IRS is also hiring thousands of new auditors this year so the "they're too busy" excuse is getting less valid. One important distinction: mistakes = penalties. Deliberate fraud = potential criminal charges. If your sister "invented" an Uber business that didn't exist, that's not a mistake, that's fraud.

Side note but really important - tell your sister NOT to lie again on next year's taxes thinking she can "balance it out." Each tax year is separate and trying to fix fraud with more weird reporting just compounds the problem. I've seen people dig themselves into huge holes this way.

Your sister needs to understand this isn't just about "getting caught" - it's about doing the right thing. I work in tax preparation and see this kind of situation more often than people think. The stress and anxiety of wondering if/when the IRS will notice often ends up being worse than just dealing with the consequences upfront. A few practical points: First, the IRS has sophisticated matching systems that compare reported income and expenses across different sources. If she claimed Uber expenses but has no 1099s from Uber, that's an automatic red flag. Second, even if she got away with it this year, these things have a way of catching up - the IRS can audit returns up to 3 years later (6 years for substantial underreporting). The amended return route really is her best option. Yes, she'll have to pay back the money plus interest, but that's infinitely better than potential fraud penalties of 75% of the underpayment plus possible criminal charges. The car purchase actually makes this more complicated since she'll need to figure out how to pay back the refund. Bottom line: encourage her to consult with a tax professional immediately and file that amended return. The longer she waits, the worse this could get.