Jason Shepherd (Frankie Muniz) is a 14-year-old boy from Greenbury, Michigan, known for his talent as a compulsive liar. His habit of fabricating stories often gets him into trouble, and one such incident occurs when he tries to avoid completing a creative writing assignment. His English teacher catches him lying and informs his parents, giving Jason an ultimatum: he has three hours to submit his essay, or he will face summer school.
Initially, Jason struggles to find inspiration for his essay. However, he remembers a comment from his father, who once told him that his knack for creating stories is a natural talent. Motivated, Jason writes a story titled Big Fat Liar, drawing inspiration from his own tendency to stretch the truth. He sets out to deliver the essay on time, riding his sister’s old bike, but his trip takes an unexpected turn when he is hit by the limousine of Marty Wolf, a self-centered and unscrupulous Hollywood producer. Marty offers Jason a ride to his destination. During the ride, Jason’s essay falls out of his backpack and is left in Marty’s limo. Unbeknownst to Jason, Marty reads the essay and sees its potential as the basis for a movie.
When Jason realizes his essay is missing, he tries to explain the situation to his teacher and parents, but his reputation for lying works against him. As a result, he is sent to summer school.
Weeks later, Jason and his best friend, Kaylee (Amanda Bynes), go to the movies and see a trailer for Marty Wolf’s upcoming film, Big Fat Liar. Jason instantly recognizes the storyline as his own. Determined to reclaim credit for his work, Jason and Kaylee devise a plan to confront Marty. With their parents out of town, they fly to Los Angeles and sneak into Marty’s office at the studio. Jason demands that Marty confess to stealing his story and inform Jason’s parents of the truth. Marty, however, mocks Jason, burns the essay in front of him, and has security escort Jason and Kaylee out of the building.
Angered by Marty’s arrogance, Jason and Kaylee resolve to sabotage his life until he admits to his wrongdoing. They enlist the help of Frank Jackson, Marty’s former limo driver and a struggling actor who harbors resentment toward his ex-boss. Together, the group begins executing a series of pranks aimed at making Marty’s life as chaotic as possible.
The first prank involves dyeing Marty’s skin blue by tampering with his swimming pool and turning his hair bright orange with his shampoo. Next, they glue Marty’s headset to his ear, forcing him to wear it during a meeting. Jason and Kaylee then trick Marty into attending a child’s birthday party, where the children mistake him for a clown and attack him. To make matters worse, they sabotage Marty’s car, causing it to malfunction during a drive. His car is later rear-ended by an elderly woman, pushing it into the path of a monster truck driven by a wrestler named the Masher, who completely destroys the vehicle.
These pranks derail Marty’s schedule and cause him to miss crucial appointments with Marcus Duncan, the president of Universal Pictures. Marty had been pitching Big Fat Liar to Marcus as his next big project, but Marcus, aware of Marty’s poor track record following the commercial failure of Whitaker and Fowl, is hesitant to greenlight the movie. When Jason offers to help Marty salvage the situation in exchange for his confession, Marty agrees. With Jason’s input, Marty delivers a successful presentation to Marcus, who approves the film’s production. However, Marcus warns Marty that any further mistakes could jeopardize his career.
Despite their agreement, Marty betrays Jason by calling security to remove him and Kaylee from the studio once again. Disheartened but not defeated, the teens find an unexpected ally in Monty Kirkham, Marty’s overworked and mistreated assistant. Monty, fed up with Marty’s behavior, helps Jason and Kaylee rally Marty’s other employees, who are eager to see their boss face consequences for his actions. Meanwhile, Jason calls his parents and comes clean about everything that has happened.
The next morning, as Marty prepares to begin filming Big Fat Liar, his employees band together to sabotage him further. Delayed by a series of mishaps, Marty eventually arrives at the set only to find Jason waiting for him. Jason steals Marty’s prized stuffed monkey toy, Mr. Funnybones, and leads him on a chase across the studio lot. The pursuit culminates on a rooftop, where Jason taunts Marty with the toy.
Furious, Marty boastfully admits to stealing Jason’s story, unaware that their entire conversation is being broadcast live to Jason’s parents, Marcus Duncan, and the media. Marcus immediately fires Marty for his dishonesty, and Jason’s parents are finally convinced of their son’s integrity.
As Marty realizes his career is over, he attempts to attack Jason, but his effort backfires. Marty falls off the roof, landing safely on a stunt cushion below. Jason takes the opportunity to thank Marty for inadvertently teaching him an important lesson about the value of truth and integrity.
Following Marty’s dismissal, Universal proceeds with the production of Big Fat Liar, using the talents of the employees Marty had mistreated. The film becomes a critical and commercial success, and Jason receives full credit as the story’s original author.
Marty, meanwhile, faces financial ruin and is forced to take a job as a birthday clown. In a twist of fate, he is hired to perform at a party held at the home of the Masher. Upon realizing the clown is Marty, the Masher orders his young son, Darren, to punish him. Darren gleefully charges at Marty, delivering a powerful kick to his groin. Marty collapses in agony as the guests look on, bringing his humiliating downfall full circle.
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