Finding the idea of filing your tax return this year a bit like waiting for impending doom? Whether it’s because you find the tax system confusing or you anticipate owing the IRS money, nothing induces stress in Americans like tax time. Confusing laws, complicated stipulations and an endless array of loopholes can make filing your taxes a bit like navigating a maze. Unfortunately, that leads to mistakes – costly mistakes that could even result in jail time, if you aren’t careful. Protecting yourself and your finances from errors is a vital step in avoiding problems, as is understanding where most taxpayers go wrong in the first place.
Failing to File At All
Easily the most common “mistake” citizens make, failing to file your taxes can be considered a crime — especially if the IRS can prove that you did it on purpose. The vast majority of people who don’t file either don’t believe they need to file or don’t file on purpose, hoping to dodge costly payments from unclaimed income in the event of an audit.
But you can still be audited, even if you don’t file, so this isn’t a wise approach to take.
In fact, anecdotal evidence sourced from those who have been audited show a marked increase in audits against people who regularly refuse to file their taxes each year. Essentially, the longer the period of time between the last time you filed and the current point in time, the more likely the IRS is to scrutinize your finances. Their hope, of course, is to identify tax dodgers that cost the government money.
If you have a tax bill from a previous year, and you don’t file in a timely manner out of an effort to dodge the bill, you can be arrested and charged with tax evasion. The IRS can also garnish your wages.
Thinking about working under the table to avoid the IRS? This is potentially an even worse idea. If you are audited and the IRS finds proof of your work and failure to file, they have an excellent case against you for premeditated, planned tax evasion.
The answer? File your taxes on time every year. If you have not filed for a couple of years, you are better off to file late than to never file at all.
Not Changing Your Status
What is likely the second most common (and often purposeful) concerns the status you list on your income tax report. Filing as single when you are married, married when you are single, or any other illegitimate status is considered a form of tax evasion.
When filing your tax return, you must indicate your filing status accurately. Status significantly impacts the amount of money you owe, depending on how you file, which is what leads most citizens to fudge it in the first place. Status options fall into five individual categories:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
How you file depends on your status as of the last day of the calendar year. Here’s an example: you become married on November 21st. You may choose to file jointly or separately when you file the year’s tax report in February, but you must pick one and indicate it correctly on your return. If you didn’t get married until January 4th of this year, you would still file the previous year’s taxes as single. Likewise, you would indicate widowhood with a dependent child based on the date you became a widow.
But the news isn’t all bad when it comes to filing status; most citizens have options. You are free to choose whichever tax status best suits you at the time you file if more than one status applies.
So what can happen if you inadvertently or purposefully choose the incorrect status? If the IRS is aware, it may trigger an audit, especially if you received a larger refund than you otherwise would have. If they can prove that it was intentional you can be arrested.
Leaving Out Info
Leaving out info can produce positive or negative effects for the taxpayer. In some cases, unintentionally leaving out information can actually result in lower tax credits, and may harm you financially. In other situations, neglecting to include some or all of your information can result in a higher refund and/or specialized credits that you might not otherwise be entitled to.
The most common way for this to occur is when filers leave blank spaces, overlooking crucial additions or subtractions that significantly change the final calculation. Failing to include income from a temporary job, leaving out a contract (if you’re self-employed), or leaving out deductions fall within this specificity.
You are far more likely to lose money on your refund if you leave out deductions. Conversely, you will most likely receive a smaller refund or be required to pay less taxes if you leave out income. But, don’t make the additional mistake of assuming that you only need to pay attention to income and deductions; many other forms of information qualify under this potential mistake, too:
- Medical, dental, and vision care bills
- Costs associated with job hunting
- Business records
- W-2’s, 1099s, and other employment records
- Proof of salary from your HR department
- Records of real estate property improvements and sales
- IRA account actions, whether selling or investing
- Forgiven debts
Of particular importance is keeping and filing good records for every penny you make throughout the year. Failing to do so can qualify as tax evasion. If the IRS discovers the error and you ignore their adjustment or bill, you can then be arrested.
Claiming Children Incorrectly
For parents, either single or married, claiming children properly on your tax return isn’t always straightforward. Whether or not you list your child as a dependent on your tax return depends on factors like how much income your child makes, whether or not you’re married or single, and whether or not your child lives with you for the majority of the year.
Firstly, understand that if your child works or is older than 19, he or she may not qualify as a dependent child. Once your child reaches the age of 19, they must be in school full-time and living with you for at least half of the year to qualify. Living on campus or away at school does, fortunately, qualify as “living with you.”
If you qualify as an eligible dependent yourself, you cannot claim a dependent on your tax return at all. Your eligible dependent would fall under your caretaker’s return instead. This is often the case for young people with children who remain under their parent’s roof.
Incorrectly claiming a child is especially common for those who have recently separated, divorced, married, or otherwise changed their filing status in the last year. Judging exactly who should file the dependent child becomes even more complicated in situations of joint custody, particularly where joint custody is a 50-50 split between both parents. Understand that, regardless of other factors, only one parent at a time can claim a dependent child.
If you are filing a joint return, file the dependent child on the same return. If you are filing as “married but filing jointly,” either parent can file – but only once. If you are separated, or filing as a single parent/head of the household, whether you claim your child or not may depend on the decision of the courts. Parents often alternate years, but in some cases, that depends on whether the absent parent is caught up on child support or not. Check your own court orders to learn the details of whether or not you are eligible to claim your child.
If both of you list the same child on your tax return, you can expect a letter or visit from the IRS requesting clarification. If you fail to correct the problem or refuse to cooperate in a timely manner, the IRS can judge it as tax evasion or even fraud, something that comes with big fines and even jail sentences down the road.
Inflating Charitable Donations
Charitable donations – they’re good for the world. Depending on how you file them, they could even be good for your pocketbook at the end of the year. According to Forbes Magazine, making charitable donations to a recognized charity directly reduces your tax burden simply because the government considers them as a deduction.
But not every donation qualifies every time you donate.
In order to qualify, you must donate to a recognized and pre-approved charitable organization found on this list. Before you donate, you should always verify that the organization to which you donate does, in fact, appear on the EO Select Check tool hosted by the IRS. If it doesn’t, you can still donate, but it won’t typically qualify as a deduction on your return.
Caveat: some churches and other religious organizations may not be included on the list, but may still qualify as a deduction. If you’re not sure, check the Other Eligible Donees list. Or, contact the IRS by telephone.
Last, but certainly not least, is the fact that donations must be filed correctly in order to qualify. Itemize them on Form 1040, lines 16, 17, 18, and 19. Include proof (usually in the form of receipts or a thank you letter from the organization) whenever possible.
Considering inflating your donation amount for a greater deduction? Stop while you’re ahead. Falsifying the amount you donate still qualifies as falsifying your tax return, and the IRS does have the ability to request proof of donation from the organization of your choice. Likewise, including a donation to an entity not supported under the donee or organization list can also be qualified as a mistake or fraud.
Neglecting to File Self-Employment Income
As the world progresses, the number of people working freelance, contract, and gig work jobs increases. This is a natural response to the increased need for easy access to creative and technical workers all around the world. People can now offer services in fields like coding, web development, copywriting, editing, and even tutoring from almost anywhere in the world. If you choose to become of the many pioneers heading down this road, you should know that the income you make must be filed as self-employment income.
Because the government is still catching up to modern working styles, some self-employed freelancers will purposefully inflate numbers or leave out income, especially if they work for individual clients who might not otherwise file their income with the IRS. Neglecting to claim income received from clients outside of the United States is also very common (but is still illegal).
Self-employment falls under a different tax legislature than normal work income; the IRS considers you both employer and employee. Unfortunately, that also means they hold you responsible for a hefty 15.3 percent Social Security and Medicare tax. Essentially, you pay both the employee and employer’s share. To make matters worse, this is over and above your regular federal, state, and local tax rates.
It’s not difficult to see why some may be tempted to skirt the rules. But, just because your client didn’t register the income with the IRS or your income came from a client in another country doesn’t mean the IRS won’t discover the missing income.
If you work through Paypal, and make over $20,000 a year, Paypal generates a report that the IRS can audit and access. Working through payment solutions like Authorize.net or Amazon Payments is even more more risky, as credit card and payment processing solutions fall under special legislature designed to prevent fraud and money laundering.
How can you avoid hefty penalties as a self-employed individual? Include every cent you make throughout the year, no matter how inconsequential it seems. Include the income on Form 1099, and attach or at least retain proof in the form of receipts, invoices, or payment confirmations.
Tax refund errors are exceptionally common. At the end of the day, most people want to get the most out of their return, whether that’s a deduction in the amount you need to pay or the amount you receive on your refund. But neglecting to file your taxes correctly can land you in hot water, especially if you make the errors on purpose. Martha Stewart, Darryl Strawberry, and Al Capone – all three had one thing in common; they purposefully evaded taxes and paid for it with jail time. Don’t let yourself fall into the same trap.