3 Common Mistakes To Avoid
We’ve all heard the quote by Benjamin Franklin “In this world nothing can be said to be certain, except death and taxes”. Yet despite April 15th being on the calendar every single year, and March 15th for business, millions of people find themselves on the IRS hit list for failing to comply with a few basic things.
Whether it’s the “I’m too busy right now, I’ll get to it next week” excuse, or just feeling overwhelmed with all the paperwork, it’s not uncommon for taxpayers to find themselves in hot water with the Internal Revenue Service.
31 million people are not withholding enough for taxes, according to this CNBC report, and this could lead to a lot of them owing the IRS more than what they think. In addition, here are 3 common mistakes people make that often lead to getting a nastygram from the IRS.
1) Overlooking Income or Inaccurately Reporting Income
We all want to limit our tax liabilities but manipulating your income in an attempt to hide money is not a winning strategy. This can easily land you in heaps of tax trouble, so it’s important to accurately report your income.
Tax Avoidance vs. Tax Evasion
Tax avoidance are the legal things you do to avoid paying more taxes than necessary. Where it can get you in trouble is if you’re evading the tax authorities either by doing something, like filing a tax return after falsifying your income or deductions to get a favorable tax bill, or by not doing something you’re supposed to, such as not reporting all your income or not filing a return.
Michael Cohen, Donald Trump’s former lawyer was recently sentenced to 36 months in prison, in part for 5 counts of tax evasion. He failed to report $4 million in income from his taxi fleets in New York and Chicago, $30,000 in profit for the sale of a Birkin Handbag he arranged, $100,000 profit from selling a property, and $200,000 in consulting fees.
Now, most Americans don’t mean to evade the IRS and under-report income. If you’re like most people, you might just forget to report that side-gig you have as income, or the cash payments you received. In any case, making a list of all the ways you made money that year and gathering supporting documents, as well consulting with your tax advisor, are some ways to prevent the common mistake of inaccurately reporting income.
2) Misunderstanding Extension Rules: Filing and Paying Late
By not filing your tax return timely you’ll be hit with the IRS’s 25% failure to file penalty.
Of all the mistakes people make when it comes to taxes, this one is the most common and often the most costly. Most people think that filing for a tax extension means they also get extra time to pay without any consequences. That’s just not true.
When you file for an extension you also get hit with penalties, interest, and other fees if you don’t pay in what you owe with the extension. This alone could cost you a strikingly large amount, especially if you’ve built a habit of always filing for an extension.
3) Pushing It With Your Expenses or Unrealistic Deductions
Commingling your business and your personal expenses, exaggerating deductions or writing off things you’re not supposed to can trigger loads of red flags and can cause an IRS audit. Writing off that vacation to Hawaii? The designer clothing you say you need for work? What about your mileage to and from your main place of work? All of these are no-no’s and have strict rules if you do deduct them.
Staying compliant by getting all of your un-filed tax returns filed and having a tax professional guide you is the fastest and easiest solution to staying out of tax trouble. Contact us for more information.