big-taxes

8 Tax Mistakes to Avoid

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.

Comments

  1. says

    Hi Adam,

    Some great points. I especially concur with your final point about people thinking they are saving money by submitting their tax returns themselves when in actual fact it a false-economy because they undoubtedly would receive more of a rebate by hiring the correct professional to minimise their returns.

  2. BewareofMommaBear says

    Hi again, lol. Still the calm MommaBear here, who used to… guess what? Yup, prepare taxes. For many, many years. You put a lot of great info here, Adam, thank you. I just wanted to mention a couple of things:
    First, your link to “publicly announced” does not seem to work for me.
    Second, the IRS is definitely on the look-out for under-reported income, but something that many people don’t realize is that they are also on the look-out for OVER reported income and/or under-reported expenses in certain (and NOT that uncommon) situations. This sounds backwards to many people, but I have seen it happen frequently, especially when a taxpayer has children and/or low self-employed income, and they qualify for EIC. A larger refund will be seen when reporting more than the actual income possibly combined with omitting some/all of valid expenses.

    As more and more people try to do their own taxes using a program, more people are finding out about this situation, but the problem is, they THINK it’s okay to report too much income – IT IS NOT! They don’t realize that OVER reporting is JUST AS WRONG as UNDER reporting income, and omitting expenses is just a way of over-reporting income.

    I would also like to share something I have discovered over my years of preparing tax returns with those who would like to “save money” by attempting to do their own taxes – especially people that are really NOT familiar with taxes and the tax laws. I have reviewed HUNDREDS of tax returns prepared by other companies as well as by the taxpayers themselves. Most of the taxpayers who prepared their own return using software such as TurboTax (I personally prefer Tax Act) were VERY confident that their taxes were done correctly – before they were reviewed. Hey, the program guarantees accuracy, I heard over and over again. However, like other programs, it can only be as accurate as the information it receives. I have to run, but to sum it up, I found mistakes in OVER 95% of all self-prepared (using popular tax software) returns, and approximately 75% of those mistakes were NOT in the taxpayer’s favor. I amended SO, SO many returns, getting tax payers back thousands upon thousands of dollars they were unaware that they were entitled to. Of course there were a few that owed money too, but many of those were because of either very careless mistakes, or what I believe were intentional “mistakes”. Gotta run. No more MommaBear talk today, lucky you :)
    Take care!
    Sharon

  3. Adam Gottlieb says

    Hi Sharon,

    Thanks for mentioning the broken link- The article was moved to a different url that also isn’t working.

    And that’s a very high percentage of people making mistakes or not maximizing their tax returns! It could be that by using the software it gives people a false sense of security. They think the program itself will take care of any inaccuracies and maximize their return for them.

    The big downside to all of our technological advances is that people are forgetting how to think.

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