Each year gives us the responsibility of filing our taxes and either getting a refund, or paying up. But while filing our taxes gets easier and easier every year with the help of technology and the internet, there’s some mistakes that we’re better off without. Here’s a look at five of them that should be avoided.
Failing to report your entire income is like begging for an IRS agent to visit your home and audit your finances. It shows you have a motive for dishonesty, and if you didn’t report that income from that one big construction job, then the IRS will think you’re hiding other income as well.
The days of being able to underreport your income are coming to an end. The IRS uses computer programs that compare your reported income with expenses reported as paid to you by third parties. The result is that if you make the mistake of showing there’s a disparity, the IRS will take action to ensure you’re not hiding any other income.
That’s why working with a tax professional to avoid big mistakes like this is so important.
Filing tax returns without having all the necessary records means you’ll probably have to take a couple guesses. While you may have a good memory, guessing a wrong financial figure on your tax return won’t help you stay out of the IRS’s watchful eye.
When declaring income on a tax return, you’ll need to provide your W-2’s, and 1099 forms. These are how most people have their income documented.
But if you earned income in one of many unordinary ways, you’ll need to have related documents. These include documents showing alimony you received, K-1 statements that document income from trusts or partnerships, and even those showing jury duty.
You may not need to submit all of these with your tax returns, but you’ll need them to make accurate entries. Incorrectly guessing your income gives the IRS a good reason to make you go through a paper audit. Better to have these documents so your guess is as good as gold.
One of the more important mistakes to avoid on a tax return is one of most common: entering the wrong information.
Some tax returns can take a while to get processed, and refunds take longer to be issued to taxpayers, because some of the most basic yet important information isn’t entered correctly.
These mistakes include erroneously entering Social Security numbers, addresses, and income figures. Also, making mathematical errors adds extra time to get your hard-earned refund as the IRS will have to redo your math.
Also, writing down the wrong bank account or routing numbers can add weeks to the tax refund wait time. Avoid the hassle by carefully entering the correct information.
Owning and controlling overseas assets will probably do wonders for your business portfolio, but not reporting them to the IRS is a mistake that will do damage to your finances.
Certain assets have to be reported to the IRS. Typically, they are combined assets exceeding $10,000. If you don’t, there’s a good chance that the IRS will find out as more and more foreign countries and banks are entering into information sharing agreements with the United States.
And the duty to report extends from the owners of financial assets to those who have signature authority over them. If that’s you, don’t make the mistake of failing to report internationally-located assets. Do the smart thing and fill out IRS Form 8938 or Treasury Form 90-22.1.
Every smart taxpayer or self-employed individual is sure to use each and every potential tax deduction that crosses their way. But it’s a big mistake to use a deduction when it’s not justified.
Deductions reduce your taxable income from your overall income figure. But if you’re claiming a substantial deduction, you better have the documents to back them up. The IRS will probably notice your deductions that substantially reduce your taxable income.
If your deduction doesn’t pass muster, the IRS will make sure you pay every penny you wrongfully withheld. That’s a mistake you’re better off without.
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