Taxes are an inevitability. For many, tax season represents a financial boon in the form of a refund. For others, it can be a confusing scramble that involves collecting receipts and hoping for the best. Even the new tax reforms enacted in 2017 aren’t doing much to simplify the process for those who go into tax season blind.
Even if a person isn’t sure exactly how to file their taxes, there are some glaring mistakes everyone needs to avoid. Learning the hard way can involve IRS audits, huge penalties, and even jail time under certain circumstances.
Avoid Exaggerating Your Income
The IRS doesn’t allow for much wiggle room. They expect taxpayers to list the exact amount of money that they’ve made according to very specific instructions. There are times when a person may pull a number from the wrong box on their W-2 and accidentally misrepresent their income.
If this happens, contact the IRS as quickly as possible and file an amended return. Changing that number on purpose for any reason can be considered a criminal act. This can result in years of audits and a felony if the IRS catches you.
Avoid doing this by carefully listing the numbers exactly as they appear. If you’re unsure of your income, work as an independent contractor, or don’t have the appropriate forms you may need to contact a tax professional. When in doubt, get help from a professional or someone who knows what they’re doing.
Failing to Keep Records
Filing taxes is all about precision. Most people receive a W-2 or another form that shows that their income is being reported to the IRS. Losing one of these can delay the ability to file taxes and create a lot of extra leg work where there doesn’t need to be any.
Having the basic records is only the beginning, though. You’ll also need to have any receipts, educational documentation, work-related expenses, property information, doctor’s bills, and other relevant records. All of these can result in tax deductions and credits that can boost your refund.
Not having this documentation can make it impossible to do an itemized deduction and even result in penalties if improperly reported.
Claiming Dependents that Don’t Depend on You
This may sound like a common-sense step, but it’s one that causes thousands of audits and refund delays every year. Some taxpayers purposefully claim dependents who don’t really live with them in an effort to get additional child tax credits. They may also claim disabled or dependent adults for the same reasons.
This is tax fraud which is considered criminal activity. People who lie about things like this are effectively stealing from taxpayers and can end up in prison.
Basic instructions state that a child must live with the individual who’s claiming them for the majority of the year, and that this person was responsible for their care. There are certain circumstances when custody agreements will allow parents to alternate claiming the children each year or allow one parent to claim the child every year.
If the other parent intentionally claims the child when not allowed to do so by the court, this can result in a dispute with the IRS. The IRS can withhold refunds, request documentation and perform audits to remedy the situation.
Remember to always check court documents and state laws before claiming a child that you share with another person.
Creating Imaginary Deductions
Tax deductions are claims that allow an individual to reduce their taxable income. That means there is less money for the IRS to tax and therefore a lower tax bill at the end of the day.
Most people have heard about large corporations that claim charitable donations in order to lower their taxes. People do this to on an individualized basis. They may exaggerate the value of items that they donated to charity or fabricate circumstances that would also lead to deductions.
This, again, is the equivalent of theft, and can land you in federal prison.
Not Asking for Help
A simple rule of thumb is, “when in doubt, get help.” There are any number of tax preparation services available locally. These may not be the best option if you own a business or need to file a more complicated return.
Some people find a single accountant that they’re comfortable with and return to this person every year. An accountant is legally able to negotiate with the IRS on a person’s behalf. If they have the proper credentials, they’ll be able to represent you if something goes wrong.
Filing taxes without help is something that only people with very simple returns should consider. Even tax programs spearheaded by brick-and-mortar companies can be faulty. Working with an accountant or tax preparation professional adds a second set of eyes that can catch small mistakes before they become expensive ones.
Failing to File Altogether
One of the worst mistakes you can make is to simply not file taxes altogether. There are some instances when filing taxes may not be appropriate. If a person hasn’t worked for the entire year or generated any income, then they’ll have nothing to put down.
Fortunately, a person has up to three years to file back taxes. After this time, the IRS has the option of creating a generic return for you that won’t offer you any type of tax breaks. Some people refused to file because they know that they’ll owe the IRS money. This is another mistake that can lead to criminal charges and financial ruin.
Anytime a person makes money through work, windfall, or investments, it must be reported to the IRS. Failing to report any income to the IRS can have disastrous results. It’s easy for the government entity to track your spending and to figure out that you have more coming in than you’ve claimed.
Independent contractors are also responsible for reporting every penny that they earn to the IRS. Although independent contractors don’t pay taxes directly out of paychecks, they still must pay taxes on their income. There are many times that their employer will report their income to the IRS, leaving no question of their earnings.
Refund Anticipation Loans
Some tax preparation services will offer what’s called a refund anticipation loan. This is advertised as a loan that is taken out against your ultimate refund amount. In reality, this is nothing more than an elaborate cash advance.
This comes complete with a high interest rate that will eat into your estimated amount. These loans will sometimes come from predatory lenders, and if something goes wrong they can aggressively collect the money that they’re owed.
There’s no place for guessing when it comes to tax preparation. Some taxpayers try to estimate their yearly total using their last paycheck or their bank statement. Unfortunately, this usually isn’t an accurate method for totaling up your annual income.
It’s never a good idea to enter any information that isn’t absolutely correct. This can create discrepancies that can prompt an audit, or a rejection of the taxes altogether.
Not Knowing Your Partner’s Tax History
When people get married, they rarely think to ask about their partner’s history with the IRS. Filing a joint return with your spouse is an implied agreement of your willingness to take on their tax debt. The IRS allows a person to file as an injured or innocent spouse in an effort to claim their portion of the tax refund, but not knowing to do this can cost thousands of dollars.
The damage can go a step further when one spouse owes tens of thousands of dollars in back taxes and fails to let the other know prior to marriage. The innocent spouse can wake up one day and find that their bank account is completely frozen, have their vehicle towed, or have a lien placed against their home.
What one spouse does impacts the financial stability of both. The only way to stop this from happening is to speak directly with the IRS and find out which option is best for you. There are ways to separate assets, but the IRS may require documentation of marital separation or divorce in order to protect them.
Recovering from Mistakes
A letter from the IRS outlining mistakes can be terrifying and leave you unsure of how to respond. The best course of action is to communicate openly and honestly with the IRS. Each state has a number of taxpayer advocates located in various cities. A taxpayer advocate is an objective professional who can speak with you about your issues with the IRS and advise you on what to do next. Doing nothing isn’t an option. Be accurate, prompt, and ask for help, and you should be able to make it through tax season without incident.