Most people love to get a big tax refund check from the IRS, but going after one can potentially lead to tax trouble with the Internal Revenue Service. It is better to get an accurate federal return that pays a smaller refund amount then to have one that is not accurate and pays a big refund.
The tax trouble usually starts with an audit, which is usually triggered by one of several things associated with a big refund check. It is a surprise to most people to learn that the first thing that can trigger an audit is the person who prepares the return. The IRS keeps an eye on the activities and the types of federal returns that are being submitted to them by Preparers. Thus, people should really think twice about using a Preparer or a company that promotes their business on the promise that they get big refund checks for their clients. Although it is possible in some cases to get a big refund check from Uncle Sam, it is statistically dangerous to use a Preparer that aggressively promotes it. Statistically speaking, there should be a natural balance between the number of people who get a refund and the number of people who do not get a refund.
Consequently, when the government sees too many big refund checks coming from federal returns being done out of one place where no one is owing any money, it raises a red flag that something is wrong and can lead to tax trouble. The Preparer may get audited to see if all the big refunds they are turning out for clients are legitimate. Once the Preparer of those returns gets audited, then all of their clients usually get audited as well. Even if someone has a legitimate federal return with no problems, they can get put under the microscope because their Preparer was doing bad things on other people’s returns.
People should take caution if someone says to them “use my Preparer because they always get me a big refund every year.” A lot of times, tax trouble is like the flu, it can spread through an office or work environment quickly. Triage Tax Relief has represented clients in audits where dozens of people at one work site used the same Preparer because they got big refunds only to find out later that the Preparer was being audited.
Another common way to get a big refund check is to include a lot of deductions on the federal return. The deductions offset the income reported, which ultimately lowers the amount that a person owes or it increases the amount of their refund. Taking deductions that a person is not entitled to take on their federal return can also lead to tax trouble. For instance, if someone has an income of $50,000 and they take $35,000 in deductions, the government is most likely going to say that the deductions on that federal return look too high for the amount of income reported, so they will audit that return for accuracy. A big refund on it’s own can trigger a review by the IRS, so beware of the quest for a big refund.