Tax season is an overwhelming season. Even though there are several guided tutorials and self-service instructions, there is a lot of room for error. During the year, tax exemptions and regulations may have changed. Before you complete your taxes, check out the common tax mistakes that will get you audited by the IRS.
Technology provides citizens with an abundant amount of tax preparation and filing options. Don’t opt for the cheap route when it comes to your taxes and manually tackle those forms with a pencil and calculator. There are a number of free online tax preparation services online – and the system will calculate everything. If you earn less than $69,000, there are free filing options available.
Additionally, there are video chat options to assist in the streamline process; however, if you feel more comfortable with a physical person consider going to an established accountant. In most cases, the preparer will take full liability for any potential mistakes – which alleviates any potential IRS issues from arising. Always double and triple check your numbers.
Forgetting to Claim All of Your Income
With the contracting industry booming and more people working on freelance contracts, the omission of claiming all income is a growing issue. Most companies, that hire freelancers and/or contractors, file a 1099 form – and the wages are reported to the IRS. Before filing, if you don’t already maintain a list of incoming income, create a list. Compare your list with the W2's and 1099s you receive.
Other sources of income that must be reported are alimony checks, maternity or paternity benefits, disability, and interest earned from bank accounts. If you are expecting a 1099 or W2 and haven’t received one, don’t assume everything is okay. Reach out to the appropriate organization and/or individual(s), and request the paperwork needed. As a side note, check your email. Many small businesses can now email a 1099 as well.
Questionable Credits and/or Deductions
When it comes to charitable donations, think twice before you enter the amount. Inflating your donation amounts can trigger an audit. It’s better to underestimate and research actual values. The IRS has a user-friendly resource on their site.
Another growing deduction is the home office. While this is a legit deduction for a lot of workers, make sure you have the designated space and can provide receipts for any expenses you are claiming. If you’re into flow charts, check out the IRS’ guide.
The Earned Income Tax Credit (EITC) has changed its requirements in the last two to three years. The EITC is a benefit created for low to moderate incoming working people – mostly households with children. Double, and potentially triple, check that all of your income is reported accurately. If you fail to claim income, that pushes you out of the EITC, you will be audited and pay penalties to the IRS.
Last but certainly not least, in terms of deductions, make sure you are claiming the appropriate number of dependents. If you are not supporting a dependent you shouldn’t, under any circumstances, claim that individual on your taxes. Oftentimes, custody agreements can credit a grey area when it comes to claiming children. If there is ever any question, check your custody agreement and/or consult your lawyer.
Rental Property Loss
You must be an active participant in the management of your rental property or a licensed real estate professional in order to claim a deduction for a loss from a rental. According to forums and comments on various tax sites, some taxpayers who didn’t receive enough rental payments to cover their mortgage and/or taxes have assumed that they are entitled to this deduction; however, that is not the case. If you are unsure on this deduction, consult the advice of a tax professional before filing.
Hobby Versus Business
With the uptick of Etsy shops and other contracting services, many taxpayers are confused about claiming hobbies. If your expenses exceeded what you made, that doesn’t necessarily mean you’re entitled to deduct a tax loss from your business. The general rule is if you haven’t made money in at least three to five years, your business is actually a hobby – and not a business.
I know what you’re thinking; does it really matter if I round the amount? The answer is it absolutely, 100 percent does matter! This common practice triggers the IRS to believe you are making up numbers. If the amount is $75.98, stick with that actual number, and not $76.00. It’s okay to occasionally round; however, if rounding is your regular practice that is a no-go. Always have documentation for your deductions and credits and use the actual numbers that match your receipts and/or other records.
The Home Buyer Credit
Taxpayers have people who flip homes to thank for the scrutiny on this deduction. The first-time homeowner credit has been abused in the past; therefore, the IRS will review anyone claiming this credit. The IRS will check to see if you stayed in the home for at least 26 months (three years) as the requirement states.
These are the most common mistakes most taxpayers commit that lead to an audit. Don’t wait until the last minute to file your taxes or request an extension. To avoid potential problems, consider:
- Creating lists of income sources
- Creating lists of deductions (and amounts)
- Designate a location (in your residence) where you can collect documents needed for taxes
- Reach out to tax professionals with any questions prior to completing your taxes
- Double check and/or request receipts for any expenses you plan on claiming
The key to successfully filing taxes is preparation. If you choose to be proactive with your actions, the following year’s tax preparation will be easier and, in many cases, you’ll already have everything needed ahead of time.