7 Tax Mistakes People Almost Always Regret
Uncle Sam isn’t someone you want to mess with. Everyone has to pay taxes, but many people make missteps that can be costly in more ways than one.
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Tax season is still months away, but it’s never too early to start learning what not to do when it’s time to file. Here’s a look at seven tax moves you don’t want to make.
Not Understanding the Implications of Filing a Joint Return
“When you and your spouse file a joint return, you are making an election to do so because each party is 100% responsible for the accuracy of the return and the taxes that may be due,” said Morris Armstrong, founder & owner at Morris Armstrong EA LLC. “Everyone loves the tax benefits of the joint return, but none of the headache when they find out that one spouse has reported false information and the tax situation is different than what appears on the return.”
He said the IRS has a tax code that addresses this situation, known as Innocent Spouse Relief.
“In my practice I hear this too often, ‘I wish I had not signed that return,’ and yet people need to understand that the MFS [married filing separately] return is default and MFJ [married filing jointly] is a choice,” he said.
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Not Filing Your Tax Return
Failing to file a tax return because you don’t have the money to pay your tax bill is the worst possible thing you can do, Armstrong said.
“The IRS charges a penalty which will be effectively 25% of the tax due for those that eventually file a late return,” he said. “The IRS has 10 years to collect a tax debt and that date begins when filed — when the tax is assessed.”
If you never file your tax return, he said the collection statute will never begin.
“File your return, and then look at the various programs that the IRS has which will allow you to pay over time,” he said. “If your situation is dire enough, the IRS may place you in a ‘Currently Not Collectible’ status and review that yearly.”
For those who qualify, he said the IRS also offers payment plans.
Failure to Disclose All Income
“Underreported income may be detected by the IRS if the income reported on the tax return does not match income reported to the IRS on forms such as W-2 and 1099,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting US. “An IRS audit of a taxpayer may even lead to a review of deposits in the taxpayer’s bank accounts to look for unreported income or expenditures by a taxpayer or a taxpayer’s lifestyle in excess of the taxpayer’s reported income.”
He said this could cause you to incur penalties and interest on the unreported income — and even face possible criminal action.
Claiming Excess Deductions or Credits
“The IRS has computer systems that look for unusually large deductions or credits claimed on a taxpayer return in relationship to its reported income,” Luscombe said. “This can result in an audit requiring the taxpayer to provide documentation for the claimed deductions or credits.”
If findings aren’t in your favor, you could be in big trouble.
“Unsupported claims for deductions or credits can result in failure to pay penalties and interest and also possible criminal action,” he said.
Forgetting to Claim Deductions or Credits
“The IRS will catch missing income items on your tax return, however, it will not correct your return if you forget to claim deductions or credits,” said Lisa Wood, CPA, MT, director of tax for Buckingham Advisors. “Missing deductions or credits you are entitled to will result in a higher tax liability.”
She said some of the most commonly missed credits are the Child Tax Credit, Child and Dependent Care Credit, credits for school tuition paid and deductions for student loan interest.
Not Paying Your Taxes
“If your tax liability is not paid by the due date, the IRS will send you a notice assessing interest and penalties in addition to the tax owed,” Wood said. “If you do not respond to the notice, the IRS will put you in collections.”
She said this could include placing levies on your bank accounts and wages, as well as filing a federal tax lien to notify creditors of your tax debt.
“It is important to note that filing for bankruptcy will not discharge your tax debt and any associated liens,” she said. “If the IRS labels you a ‘seriously delinquent’ taxpayer, restrictions can be placed on your passport.”
She said this will prevent you from traveling outside the U.S., along with obtaining or renewing your passport.
“The IRS may eventually turn your account over to a private debt collector,” she said.
Inaccurate Bank Account Information
“If a routing number or account number is not entered correctly, any payment due cannot be withdrawn,” Wood said. “This will result in additional late payment penalties and interest.”
If you’re due a refund and your information is incorrect, she said the bank account verification might fail.
“In this instance, the IRS will mail a paper check which will take several weeks,” she said. “If the bank account information you entered belongs to someone else, they may receive your refund deposit.”
In this case, she said you’ll need to work with your bank to try to get your refund back.
What To Do If You Owe Back Taxes
“Back taxes should be paid as soon as possible,” Wood said. “Interest on the unpaid balance continues to accrue until the amount is paid in full.”
She said you should review all options to raise the money owed, including personal loans and home equity loans.
You may also want to consider working with a tax resolution company, such as Tax Relief Advocates, who can work with the IRS and may be able to reduce the amount of tax debt you owe.
“You can request a short-term extension for up to 120 days to pay the balance in full,” she said. “There is no fee with the extension request, however, the IRS will charge penalties and interest on the unpaid balance.”
She said the IRS allows you to request an installment agreement or a payment plan. There is an application fee to apply, but if your request is accepted, you’ll pay a reduced rate for penalties incurred.
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This article originally appeared on GOBankingRates.com: 7 Tax Mistakes People Almost Always Regret
