• Overstating your deductions can mean big trouble with the IRStax time image by Gale Distler from Fotolia.com
  
  According to the Internal Revenue Service (IRS), taxpayers are only allowed to claim deductions for which they qualify. The eligibility guidelines are outlined in the instructions and publications offered by the IRS and by the tax law representatives at the IRS. Taxpayers are required to retain documentation for their deductions, and the IRS reserves the right to request substantiation. If the IRS determines a taxpayer overstated his deductions, he will be subject to a variety of penalties.
  
  

Audit

• Taxpayers who overstate their deductions are more likely to have their returns audited than those who don't, because overstatements sometimes trigger an audit.
  
  

Penalties

• Penalty fees may result from overstatement. Once the IRS has determined that a taxpayer overstated his deductions, the taxpayer must pay the unpaid tax that resulted from the overstatement as well as a failure-to-pay penalty. The penalty is one-half of 1 percent of the tax not paid by the due date. The penalty increases each month the tax and penalty are not paid. A negligence fee of 5 percent of the unpaid tax may also be required, depending on the reason for the overstatement of deductions. The taxpayer is charged an additional 75 percent of the unpaid tax if the IRS determines the overstatement resulted from fraud. An additional penalty is assessed if the IRS determines that the unpaid tax is substantial, which is defined as more than 10 percent of the correct tax amount or $5,000, whichever is larger. Frivolous submissions of overstatement on a tax return, as determined by the IRS, result in a penalty of up to $5,000.
  
  

Interest

• Interest is charged on all unpaid tax. The interest rate is the standard rate plus 3 percent and can change monthly. Go to the IRS website to determine the rate of interest you must pay.
  
  

Disallowance

• Taxpayers who fraudulently claim deductions and credits face a period of disallowance. For example, if you claimed the earned income credit (EIC), but were not eligible to receive the credit, you will not be allowed to claim the earned income credit for two years if the error resulted from negligence and for 10 years if the error resulted from fraud.
  
  

Incarceration

• Prosecution and imprisonment are possible if the IRS has substantial evidence that you overstated your deductions out of a willful intent to mislead or conceal your income. The IRS statute on tax fraud recommends imprisonment for up to five years if convicted.
  
  

Fines

• Individuals found guilty of tax fraud as a result of overstating their deductions may be charged up to $250,000 in fines, and businesses may be charged up to $500,000.