Messing up your taxes is easy, unfortunately. Forget about one deduction, accidentally transpose a couple of numbers, or lose track of an important document: That's all it takes. Whether your initial mistake hurts you or the government, it'll always come back to haunt you in the end because the government has the resources to track you down and straighten things out if you shortchange it.
Avoiding tax mistakes takes a careful eye and patience to see that you do everything by the book the first time. While this isn't an exhaustive list, here are a few of the most significant tax errors you should try to avoid.
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1. Not filing on time
You must file your return or request an extension by April 15 to avoid the failure-to-file penalty. This will cost you 5% of your tax bill for every month that your return is late, up to a maximum of 25% of your bill. If you're expecting a refund, there usually isn't a penalty for failing to file a return, but you won't get your money back, either.
Plan to file your tax return well in advance of the deadline, if possible. You should file even if you don't think you'll be able to pay your tax bill. You can always work out a payment plan with the IRS if you need to, but at least you'll be able to avoid the failure-to-file penalty.
2. Not paying your bill on time
Those who owe the government money must either pay their bill by the tax deadline, file an extension, or set up a payment plan with the IRS in order to avoid a failure-to-pay penalty. This is 0.5% of your tax bill per month up to a maximum of 25% of your bill. If you end up with a failure-to-file and a failure-to-pay penalty, your total monthly penalty will not exceed 5% of your tax bill.
Ideally, if you expected to owe the government money, you set aside funds throughout the year to cover your bill. But if that's not the case, you can reach out to the IRS to figure out what you can do to avoid the failure-to-file penalty. You might be able to pay your bill in monthly installments or you can agree to an Offer in Compromise: You tell the IRS what you can afford to pay, and if it agrees, then you pay that amount and your tax bill is considered settled.
3. Trying to hide money from the IRS
You are responsible for reporting all the income you earned throughout the year, but the companies you worked for must also report how much they paid you. If the two numbers don't match up, the IRS is probably going to investigate why there's a discrepancy, and that could bring them to your door.
Never try to hide income from the government even if you think it won't find out. You could get audited, and then you'll have to spend even more time on your taxes and pay what you are supposed to owe. Plus, the government could charge you a penalty for tax evasion. The most flagrant offenders could face up to five years in federal prison.
4. Claiming tax deductions and credits you don't qualify for
Artificially inflating your tax refund by claiming tax deductions and credits you don't qualify for is also a form of tax evasion. Claiming deductions or credits without documentation to back them up is a problem, too, because if you're audited and you cannot prove that your deductions were legitimate, the IRS can disallow them. So you need to hold on to all receipts and documents that prove that you're not trying to defraud the government.
Always check the rules for the tax deductions and credits you plan to claim every year because requirements can change. For example, in 2018 and 2019, you could write off medical expenses that were more than 7.5% of your adjusted gross income (AGI), but for the 2020 tax year, you can only write off medical expenses that exceed 10% of your AGI. Your tax software or accountant should help you determine which credits and deductions you qualify for.
5. Not claiming all the deductions and credits you do qualify for
The government won't come after you if you miss some tax deductions or credits that you could have claimed, but you could cost yourself hundreds or even thousands of dollars. It might take more time to comb through your receipts to find deductible expenses or to check whether you qualify for certain tax credits, but the potential savings are definitely worth it.
Getting the best deal at tax time means going over your return carefully and avoiding these five mistakes. Start on your taxes if you haven't already, and double-check everything to ensure there aren't any mistakes.
