Filing taxes in every tax season is not a complicated task to do in the United States. While most taxpayers are trying hard to file accurate taxes and make it IRS-compliant, there are some common mistakes they make every tax year. Due to certain tax filing errors, businesses receive the IRS (Internal Revenue Service) audit notice.
Taxpayers find it challenging to navigate different forms and compile several pieces of information. As per the IRS, the audit intends to verify whether correct information is furnished, and whether the reported amount of tax is accurate. With X.TAX you will not face the IRS audit by filing all the details accurately. Let’s discuss the common filing mistakes one could make during tax filing:
1. Failing to Report Correct Taxable Income
The most common mistake taxpayers make is not reporting all of their taxable income. The IRS also receives a copy of the 1099 and W-2 Form, so they cross-check it. Here, the IRS checks whether there is any mismatch between the reported and actual income. If any discrepancy is detected, the IRS sends an email to the tax filer. You will be asked to follow a procedure to follow. This can be a partial or full-fledged audit, according to your trust in the IRS.
Under these circumstances, you should wait until receiving the W-2 and 1099 forms. Additionally, you do not need to file the tax until you receive the tax document. Many taxpayers file well before the deadline, while employers need the W-2 and 1099 forms by January 31.
Second, whether you have yet to receive the 1099 and W-2 forms or received the wrong form, reach out to the employer. If you still haven’t received the forms after reaching out, contact the IRS by calling 800-829-1040.
2. Mathematical Errors
One of the significant tax filing errors is a math or calculation error. This error is also called a stupid mistake, which is committed by the taxpayers. You are not committing this silly mistake if you are using any tax filing software. The chance of making a mistake increases if you file a paper return. The IRS will not initiate full-blown but will send you a notice.
You will get a 60-day window to rectify the mistake. As a result, you will not get your tax return on time. So, check it twice or thrice before filing taxes to be IRS-compliant.
3. Mistaking a Hobby for a Business
Another mistake one can make is claiming business expenses for a hobby. When you are earning from a hobby, you are not allowed to deduct the costs related to that particular hobby. If the IRS observes it, they can send you the audit notice even if the income is taxable. Here, the question arises: how can you differentiate the particular activity as a business or hobby? By analyzing certain factors, you can decide clearly, and those are:
• Giving time and effort to make the activity profitable
• Have a profit for the last few years
• Comprise knowledge to make the hobby a successful business
• Carrying the hobby in a business-like manner, such as keeping records or bookkeeping
• Earning livelihood from the profit of the activity
• Hobbies consist of elements of personal recreation
4. Claiming Refundable Credits
A refundable tax credit allows you to pay $0 tax and is eligible to claim a refund. For example, if you have to pay a tax bill of $800 and $1,000 is refundable credit, you will get a $200 refund. However, falsely claiming refundable credits can trigger an IRS audit. Child tax credit, health insurance premium credit, EITC (earned income tax credit), or American Opportunity tax credit are some refundable credits.
Only apply for the legitimate refundable credit, or else you have to face consequences. 0.9% of people faced an IRS audit for claiming the EITC in 2018. Avoid this error during tax filing and be in IRS compliance.
5. Estimating or Rounding Expenses
Rounding off expenses is a major IRS red flag. You can’t round up expenses such as $303 tip income to $300, $747 of student loan interest to $750, and $98 of medical expenses to $100. If you state you are estimating the income, you have to remember that the IRS gets the information from different sources. When they find any mismatch, they verify the data more closely.
With the mismatching of dollars, the IRS checks other information as well, and the audit can be more intense. To simplify the situation, avoid rounding up the dollar or expenses.
6. Huge Donations with a Small Income
Charitable contributions are tax-deductible, but they must be according to your income. However, it’s allowed if your business faces loss and you have donated a meaningful tax. If you have false charitable deductions shown in the tax filing, you will get the IRS notice. In addition, without proper documentation of charitable expenditures, it can lead to more trouble.
7. Claiming Credits You Clearly Don’t Qualify for
One of the most common forms of tax fraud is claiming credits you’re not eligible for. While the IRS may not immediately detect this, improper claims can lead to audits. However, remote employees working for an employer are not eligible for this deduction. Whether intentional or not, such errors may lead to thorough IRS scrutiny. As a result, your tax refund will be delayed.
FAQs
- What triggers an IRS audit?
IRS audits are commonly triggered by mismatched income reports, math errors, excessive deductions, large charitable donations relative to income, or claiming credits you’re not eligible for.
- How can I avoid making tax filing mistakes?
Double-check all income sources, use reliable tax software, report expenses accurately, and ensure all tax documents are complete before filing.
- What should I do if I receive an IRS audit notice?
Respond promptly, review the notice carefully, gather supporting documents, and consider consulting a tax professional for assistance.
- Can rounding up numbers on my tax return cause an audit?
Yes, the IRS cross-checks reported amounts, and rounded figures may raise red flags, leading to a more thorough review of your return.
- Is there a penalty for claiming incorrect tax credits?
Yes, falsely claiming tax credits can result in fines, repayment of the credit amount, and in severe cases, legal consequences. Always ensure eligibility before claiming credits.
Conclusion
Filing taxes accurately is crucial to avoid unnecessary audits and IRS scrutiny. Simple errors like misreporting income, mathematical miscalculations, or improper deductions can trigger an audit, leading to additional stress and delays. By carefully reviewing tax documents, ensuring compliance, and using reliable tax filing solutions, taxpayers can minimize these risks. Staying informed and meticulous in tax filing ensures a smooth process and helps avoid complications with the IRS.
