The Most Common Tax Mistakes

If you haven’t noticed already, the collection arm of the U.S. Treasury is more present in our lives than ever. The IRS has the ability to verify every return you file.  Much of the scrutiny is done by super computers, so an audit may never be necessary for your mistake to be discovered. Do not mess with the IRS—they shoot first, ask questions later.

Here are some tax mistakes of which the IRS is already aware:

  1. Focus on the mundane details. Fairly simple mistakes look like this: Wrong social security number, failing to file on time, typographical errors, failing to check a box, math errors, filing the wrong form, missing an essential form, filing under the wrong status, and forgetting to sign your return, among others.
  2. Know the Code. Congress changes tax laws. Last year’s tax rules may not apply this year. As a result, you may miss out on deductions, exemptions, credits, or other benefits which you did not know about. Similarly, unless you keep up with the current tax law, you may be assuming certain deductions, exemptions, credits, or other benefits are coming to you, despite the government having eliminated said things. The IRS must abide by these rules. So, they expect you to as well.
  3. Report all your income. Maybe you have income derived from services you perform outside of your regular job or career. You should receive in the mail a 1099 form from those entities which paid you for your services, or who distributed income to you. Even if you did not receive a 1099 tax form in the mail, report the income.
  4. Maximize any tax advantages like retirement accounts, flexible savings accounts, and any employer sponsored benefits where you make a contribution.
  5. If you work for yourself, you will want to expense out standard expenses of running your own business. These expenses are reported on a Schedule C and are attached to your return. Deductible expenses may include home office supplies, use of your vehicle for business activity and travel, personal computers and software, meals and entertainment, professional fees paid to others like accounting or legal, postage, dues or association fees, and any continuing education or business conference expenses. In exchange for the perks of running your own business, you must pay a self-employment tax of 15.3 percent of your net income from your business. For some independent contractors, this tax may exceed your income tax.
  6. An area that triggers the IRS is when independent contractors who work from home claim expenses associated with their home office as a deduction on Schedule C. This is legal, but so often abused that it opens the door for IRS scrutiny. The business space you deduct has to be used strictly for business purposes. Such rules mean you can’t deduct a den which doubles as the family entertainment room. Also, your home office must also be your principal place of business. So anyone who spends the majority of his time working from an outside office would be excluded from claiming the deduction.
  7. If you meet the requirements, you can deduct a portion of your household expenses equal to the percentage of your home that you use solely for business purposes. It’s OK to deduct a percentage of utility costs, rent, mortgage principal, and insurance. But people who try to put all of their household expenses on their return are abusing the deduction and inviting an audit.
  8. Take advantage of available tax deductions. The IRS may not write you to counsel you which deductions you missed. Common mistakes in missed deductions or credits include: state taxes paid; re-invested dividend subtractions; out-of-pocket expenses while volunteering for charities; interest paid on student loan (even if parents paid the interest);  job-hunting expenses;  relocation expenses for job; Medicare expenses if self-employed; child care; points paid for a loan; continuing education credits; even baggage charges for business travel; and expensing out electronics used for generating income.
  9. Failing to estimate taxes on a quarterly basis, if self-employed triggers a penalty. Paying what you think your tax will be by installment saves paying this penalty.

 

Take heed that any intent to deceive the IRS will be scrutinized as a crime. Adherence to honesty remains the best policy.

Editor’s note: Crush the Enrolled Agent Exam is an online resource dedicated to helping professionals pass their EA Exams on their first try. They provide invaluable reviews, tools and study tips to fast-track the success of future Enrolled Agents.

photo credit: Diari La Veu – http://diarilaveu.com gettyimages – taxes via photopin (license)

 

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