Taxes are the lifeline of the government but serve as a burden to businesses. They cut your profits and, in some cases, compel you to pay more when there are mistakes on your tax return.
The IRS requires you to submit a tax report every year. If you made mistakes on your tax return, it is likely they will impose a fine plus interest for every month the mistake goes uncorrected.
Typically, the IRS starts with analyzing your income and determines whether or not it is entered correctly on your return. If they find errors, they will send you a letter bill indicating the correct taxable amount and specify any corresponding penalties.
Mistakes like this can be easily avoided. With the help of a tax professional, you can save yourself the trouble of being fined, or worse – IRS audits.
Learning the common mistakes that could be on your tax return, will empower you to avoid them. You’ll also be in a good standing with the IRS if you file your tax returns without discrepancies.
Penalties Imposed By The IRS
Even if you pay your taxes on time, mistakes on your tax return will prolong the process. In addition, if it is found that you owe more than you’ve paid, the IRS will impose penalties on top of the additional tax.
The usual penalty rate for mistakes on your tax return is at 0.5% per month. The rate can even reach up to a 25% fine if the error is recognized as an act of negligence or fraud.
If you submitted your tax returns and it does not match the taxable income derived from your books of accounts, the excess value will then be recorded as an unpaid tax due.
Penalty Rates For Negligence
If you did not take appropriate measures to comply with tax laws in the filing of your returns, the IRS will impose a harsher penalty.
In the case of an audit, first, the IRS will look into your financial records. If they conclude that there are omissions on your tax returns are fradulent, civil and/or criminal charges can be brought against you.
The financial penalty for the underpayment of tax is 20% more of the total amount owed plus interest. Ouch!
When you make mistakes on your tax return, the IRS imposes interest on your taxable income.
For example, if you already paid your taxes in February, if you make an error, the IRS will impose an interest of 3% every quarter, or 1% for every month that the balance remains unpaid. This is the federal short-term interest rate.
Common Tax Return Errors
1. The Miscalculation on Form W-2 and Form 1099
This is one of the most common mistakes on your tax return. This error happens when the IRS sees that the income derived from other sources do not match the income on your tax return.
When they see this mistake, they will recalculate the amount due. Upon determination of the actual value, they will send you a bill indicating the applicable tax, penalties and interest.
You should review the bill upon receipt. Sometimes, the IRS makes error in determining the taxable amount.
After you have reviewed the bill, you should amend your tax return and submit it accordingly.
If the IRS confirms that it was a mere technical error, they will send you a letter that tells whether or not they have accepted your amendments or not.
This mistake can be mitigated avoided if you hire a tax professional to prepare your books of accounts and file your tax returns.
2. Failure To File A Tax Form
A Schedule C form is a requirement for all sole proprietors who earn a profit. If you fail to do so, the IRS will impose a fine.
If you make more than $400 on your income every year, you are required to submit Schedule C along with your Form 1040. These forms indicate the amount of profit or loss you incur per taxable year.
You also need to attached forms in front of your return.
For example, if you are subject to withholding taxes, you must attach your W-2 forms including their appropriate schedules.
If you are eligible for adoption credit or homebuyers’ credit, you should attach the records that prove this eligibility.
3. Estimated Taxes
One of the most common mistakes on your tax return is the failure to file them on time thinking that you have already satisfied your tax obligations.
If you earn income in running a small business, the IRS requires you to submit estimated tax returns quarterly instead of yearly.
This can be calculated by subtracting your withholding taxes and credits to the amount of estimated tax due.
The U.S. follows a system where you, as an employer, are allowed to withhold your employees’ taxes every pay period. However, if you are an independent contractor, you need to file estimated taxes on your own.
Although this can be a burden, it minimizes your tax obligations when you file your return. Paying a lower amount quarterly is better than paying them all at once.
When the IRS processes your underpayment of estimated taxes, you incur penalties.
However, you may prevent this if your payments are below $1,000 per year since you will be exempted from filing the same.
You can also prevent penalties from paying estimated taxes if you already paid at least 90% of your taxes for a particular year.
4. Incomplete Records
Small businesses are always required to submit a complete book of accounts. These include reporting on medical expenses, depreciation of equipment and vehicles, and your income yield.
If you operate as a partnership, you are required to submit Form 1065. If your records are incomplete, you will be penalized $195 per month for each partner.
Luckily, the IRS gives you a chance to review your information if they notice a mistake before the penalty is assessed.
5. Incorrect Entry of Social Security Numbers
No one should know your social security number. The IRS requires you to input them without errors since it is their basis for assessing your tax obligations.
If you make mistakes on your tax return pertaining to your social security number, the IRS will require you to refile everything.
This could take up a lot of your precious time. In fact, filing forms usually take hours to complete.
6. Misspelling Your Name
This is among the most frustrating mistakes on your tax return.
The IRS uses the first four letters of your last name to review your social security number and its exactness.
If you misspelled your name, they will reject your return. Once the mistakes in your tax return are specified, they will require you to resubmit records.
Again, this will waste your precious energy. You would not want to spend more time completing your tax returns instead of growing your business, right?
7. Misrepresentation Of Filing Status
Your filing status determines how much tax you should pay. It indicates which filing forms you are supposed to submit.
Your filing status is also a basis for paying the lowest tax rates possible.
Applicable filings statuses are single, married filing jointly, married filing separately, head of household, or qualifying widower.
Make sure to check only one filing status and check the exemption boxes applicable to you.
8. Electronic Filing
It’s important to review your tax return before filing. If you choose to submit them electronically, you should always ensure that they are complete.
If you use tax software in completing your forms, you must flag common errors. This way, the program notifies if you miss an important detail.
9. Routing and Account Numbers
If you are eligible for a tax refund, the IRS will issue you a refund based on the account information on your return.
Mistakes on your tax return pertaining to your accounts causes a delay in receiving your money.
What’s worse? It may even be deposited to another account! Make sure you indicate the correct details, so you receive them on time.
10. Requests for Extensions
The IRS processes millions of tax returns per year.
If you fail to comply with the deadlines, you suffer the financial consequences without abatements.
If you fail to submit your tax returns on time, the IRS still gives you an opportunity to file for an extension.
Requests for extensions are honored by filling out the Form 4868.
However, upon filing, you should not forget that the deadline to pay taxes remains. Only the filing schedule is extended.
The Bottom Line
Filing tax returns are difficult especially when you have no accounting background. It can cause mistakes on your tax return which could cause you to incur penalties and interest.
If you want to save money and comply with your tax duties, hiring a tax professional improves your chances of maintaining a good standing with the IRS.
Here at LYFE Accounting, we have over 30 years of combined experience in tax filing. Our Certified Public Accountants are endowed with the highest level of certification that ensures error-free tax filing and prompt submissions.
We have served numerous clients who have benefited from our services. In fact, our team extends beyond business tax preparations.
With our services, you will not have to worry about mistakes on your tax returns. Our trusted experts have the experience to prove that you are in the right hands.