Whether you are a tax-filing newbie or a seasoned veteran, there are a host of mistakes anyone can succumb to during their annual filing with the IRS. Knowing what these common pitfalls are is the best way to avoid falling victim to their snare. Read on to learn from others’ tax mistakes so you don’t end up paying the same price. Our tax experts know that the smallest mistakes, if left unremedied, can snowball into a mountain of tax debt.
How mistakes on your tax return can lead to tax debt
To understand how serious the IRS takes tax collection, one must look no further than the staggering amount of penalties the IRS can apply for errors and oversights. There are roughly 150 different civil penalties associated with taxes, including those for filing late, not paying taxes owed or sending in an incorrect tax return. Penalties range in severity, from monetary fines to criminal penalties, and if not immediately dealt with, severity usually increases over time.
Sadly, the most common mistakes can carry heavy monetary penalties, even for the most experienced, well-intending taxpayer. Let’s review the top 5 tax return blunders:
- Not filing your tax return. The failure-to-file penalty is usually 5 percent of the unpaid tax amount but cannot exceed 25 percent. Those who file 60 days late, will face either the minimum penalty of $135 or 100 percent of the unpaid tax, whichever is smaller. What if I don’t owe any taxes, you may ask? Filing your tax return is required, whether you owe taxes or not. If you earn an income, then you must report it to the federal government. If you do not, then you will still be liable to pay the $135 dollar fine, should you file any later than 60 days.
- Not paying taxes you owe. Failure-to-pay is when a taxpayer owes money to the IRS and does not make their payment on time. This penalty is less than the failure-to-file penalty, incurring a .5 percent charge per month based on the amount you owe. A taxpayer can be found guilty of both penalty types if he/she files late and has taxes owed.
- Claiming an unqualified child/dependent. For a dependent to be considered a qualifying child, the child must meet all relationship, age, joint return and residency requirements. Many meet one or two of these requirements, but they must meet all to be a qualifying child. Accidentally claiming a child who isn’t qualified can trigger an IRS audit, causing the taxpayer to repay any associated tax breaks back to the IRS, with interest.
- Erroneously claiming head of household (HOH). Unfortunately, many unknowing persons claim HOH solely because they are the breadwinner of their family. Legally, a taxpayer must be unmarried, pay more than half of the household expenses and claim a dependent in order to qualify as HOH on their tax return. If the IRS finds out you have erroneously claimed HOH, then you will owe penalties and interest on any additional taxes. Also, interest is compounded daily and at a rate of 5 or 6 percent, which can quickly add up.
- Under/over reporting income. For those who overestimate or underestimate their income, money will be lost. This is because if you over-report your income, then you will be paying taxes on money that doesn’t exist, i.e., you will be paying higher taxes than necessary. If you underreported your income, you may get away with it for a while, but the IRS has ways to verify your income by matching what you report to the W2 or 1099 your work files with the IRS. If found out, you will be fined and forced to pay taxes on the unreported income.
As you can see, it’s extremely important to file your income tax returns correctly as mistakes can lead to steep fines and, ultimately, tax debt. For an expanded list of tax return mistakes, download our free legal guide, 10 Mistakes You Don’t Want to Make on Your Tax Return.
For additional information or if you would like to schedule a free consultation with one of our Colorado Springs tax attorneys, then click here.