Here are some tips to help you avoid mistakes oft made by small business owners and others classified as self-employed.
Reality: small businesses owners and the self-employed are increasingly pressured to fully comply with tax legislation and reporting requirements. In order to bridge to so “tax gap” (tax dollars actually collected versus what is owed), the IRS has announced increased vigilance on this slice of the tax-paying pie.
If you want to increase your chances of avoiding an audit and of getting your return as quickly as possible, you need to make an extra effort to prevent some common reporting errors:
1. Not reporting all of your income
Part of the IRS’s new vigilance is a crackdown on pre-tax income reporting. Be sure to archive any Form 1099-K’s that you receive. The new form records payments received in via credit card or through payment tools like PayPal. Be thorough and mistake-free here.
2. Not filing supporting documentation
Deductions are a big part of everyone’s tax returns. They all need to be documented. This means receipts or other documentation for medical expenses, property taxes, all brands of interest and business expenses.
3. Not understanding tax changes
The U.S. tax code isn’t a model of simplicity, and it’s always changing. For this reason, it’s crucial to learn which tax legislation changes will affect you and your business. You can do this by consulting with a qualified tax professional or by using official government web sites with the relevant information.
4. Claiming too many deductions
One red flag to the IRS is a person claiming deductions that are a bit large for her or his income. Similarly, claiming exorbitant business expenses for a side business that earns low revenue is likely to earn an audit.
5. Filing too quickly
Whatever the motivation for getting that return in fast, it’s a mistake to rush the process. A likely outcome is missing out on tax savings, perhaps taking a standard tax deduction when you could benefit from some of the deductions mentioned above.
Although the filing deadline is April 15, you can leverage some extra time by filing for an extension with Form 4867, Of course, if you owe a taxes, you’ll have to send the payment by April 15 or face late-payment penalty charges.
6. Inaccurate information, miscalculations, and omissions.
Double check all your information to combat against these common miscalculations and omissions:
- Incorrect filing status or exemptions – this can be an innocent mistake encountered in situations such as unmarried taxpayers living together with children, parents living with their adult children, etc.
- Mistakes in figuring taxable income – (make sure all your W-2s and 1099s are in your possession); withholding; estimated tax payments; or Earned Income Tax Credit
- Entering incorrect account numbers – if you are due a refund and requested direct deposit, review the routing and account numbers for your financial institution.
- Forgetting to sign the completed tax form – this will, of course, slow down your return, and in worst-case scenarios can flag you for an audit, since sometimes purposely leave their return unsigned as a way of avoiding paying.
7. Ignoring AMT
Sometimes, the amount you owe, the Alternative Minimum Tax, is actually more than you think you will if your deductions go through. Find your AMT and calculate it, and be sure not to file a report that will get you a tax bill thinking you’re getting a refund.
9. Not working with a tax professional
You’re an entrepreneur so you know that skimping on necessary expenses isn’t the way to go. If tax codes were simpler and static, you may be able to go it alone. But this isn’t your E-Z form from your first job down at the Radio Shack.
All in all, it’s important to be informed, and perform your due diligence. Always simplify, never making things more difficult than they need to be.