For most of us, filing personal taxes - or any tax return for that matter - is a crucial ordeal. We understand the ramifications of not filing or filing late, and we usually choose not to get on the IRS bad side.
It’s one thing to make a common filing error accidentally, but it’s an entirely different situation when you intentionally report incorrect or omit information.
Committing such actions leads to an IRS audit, severe fines, or even worse - litigation and jail time. Here are some of the top tax filing taboos you should avoid at all costs.
Failure to Report All Earned Income
For employees, you typically receive an IRS Form W-2 which lists your earned income and you attach it with your IRS Form 1040. But for independent contractors, you receive an IRS Form 1099-MISC if you been paid more than $600 from any one employer.
The amounts you report on your tax return must match what is on your W-2/1099. And you’re responsible for listing your earned income - even if you have multiple jobs or if you don’t receive an information return from your employer. The IRS also gets copies of your W-2/1099 from your employer; therefore, they already know what your return should report.
Failure to Report Passive Income
For those of you who are investors, income that’s brought in through investments is known as unearned income - you must also report these amounts. You should get an IRS Form 1099-DIV or 1099-INT statement from your broker, banker, or mutual funds. The IRS also gets a copy as well, so like earned income, they already know what you should be reporting.
Embellishing Tax Deductions
We all know that tax deductions can significantly lower your tax bill, and in some cases, increase your tax refund. Because of that fact, some become tempted to inflate the amounts they claim. The IRS uses a Discriminant Information Function (DIF) that confirms the average deduction amount for various levels of income.
If your claims cross the threshold of a particular income level, your filing could get pulled for review. Substantial documentation is essential if you ever need to prove filing information or amounts to the IRS.
Exaggerating Self-Employment Costs
Like tax deductions, business expenses for sole proprietors can lower taxable income on their personal tax returns. Small business costs typically range from supplies and advertising to meals and entertainment. If expenses are vastly greater than the business’ revenue, that could initiate further examination.
Improper Claim of Dependents
With the child tax credit, taxpayers usually receive a $1,000 deduction for each child under 17 they claim - you can picture how this gets exploited quickly. It’s often difficult to determine the eligible tax dependent in a genuine situation based on IRS rules regarding relationships and support earned. But creating false dependents is detected quickly by checking which names correctly show up in prior returns.
It’s critical to report information on your tax return as accurate as possible. If you have any questions about your tax situation, we strongly recommend consulting with a tax professional before filing with the IRS. And if you need more time to file, you can e-file tax extensions quickly and securely with ExpressExtension.com.
Our first-rate U.S. - based, customer service team is ready to assist or answer any questions about e-filing extensions for business, personal, or tax-exempt returns. Call us at 803.514.5155, Monday through Friday from 9 a.m. to 6 p.m. EST or send us an email message with support@ExpressExtension.com.