If you’re reading this, you may have already cheated on your taxes — but probably not on purpose.
Most people have a hard time understanding the complicated U.S. tax code. The average American got only about 50 percent of questions right when asked about income taxes, according to a NerdWallet study of 1,015 people last month. And if you’re new to this whole “paying taxes” thing, you may even underestimate how important it is to file.
“You have people who blow it all off, and they get a letter from IRS, and they freak out,” says Harry Krampf, an enrolled agent licensed by the Internal Revenue Service and owner of TaxVigilante.net. He notes that if you’re already in this situation, the best thing to do is reply to the IRS right away, resolve the matter and make sure not to repeat the mistake.
Tax Penalty Basics
The IRS knows all errors are not intentional. It can charge a 20 percent penalty of the net understatement of tax for negligence, but smack you with a 75 percent civil penalty of the underpayment for fraud if it finds evidence of more methodical cheating, like tax evasion. In this case, you could face criminal prosecution as well.
While severe cutbacks at the IRS might make audits less common this year, there’s no guarantee the IRS won’t audit you down the road. Generally, audits can go back three years, or six years if you’ve understated your income by more than 25 percent. There’s no statute of limitations on fraud, though, so you could potentially get audited years later for more serious problems. Learning how to steer clear of mistakes can help you avoid future penalties.
Here are a few mistakes you might have already made:
1. Forgetting a W-2
Just because you didn’t get a W-2 in the mail doesn’t mean you have an excuse for not paying taxes on your income. It’s your responsibility to report income from all your W-2s — documents that show how much you earned through your employer in the past year. If you’ve worked several jobs during the past year or relocated, double- and triple-check that you have all the right documents in hand before filing your taxes.
If you’re missing a W-2 and the employer who should have sent it is not responding to you, you can call the IRS, and it will take care of the matter. Be patient, though — because of budget cuts, you may be on hold for a long time before you can talk to someone.
Afterward, fill out Form 4852, a substitute W-2 you can use to estimate earnings. If you’ve kept tidy personal records, you — or your accountant — will have an easier time completing this paperwork.
2. Not reporting freelance income
Maybe you helped your neighbor redecorate his house for $500 or fixed your friend’s computer for $300. Even if you don’t get a 1099 form in the mail, as you would if you did more than $600 worth of freelance work for a certain business, you’re still required to report this income. And if you expect to owe more than $1,000 in taxes from your freelance gigs, you’re also required to make estimated tax payments four times a year. Miss these deadlines, and you may wind up with penalties.
“People don’t want to cheat on their taxes,” Krampf says. “If you don’t know what an estimated payment is, just find out what it is.” And don’t let past mistakes keep you from taking the right steps in the future, he adds.
3. Overestimating business expenses
If you plan to write off business expenses, make sure you keep careful records. Overstating your costs is easy to do by mistake, but if you’re caught fudging the numbers, it could get you in trouble.
This is an especially big issue if you’re a sole proprietor doing taxes on your own. If you take too many deductions — maybe you deemed all your driving plus the payments on your house “business expenses,” for instance — the IRS may audit you and ask to see your records. If auditors find them insufficient, you may be on the hook for penalties.
To protect yourself, scan all your receipts and save them in a backed-up folder on your computer, and keep a careful log of the miles you drive for business and personal purposes. This way, if the IRS asks for proof of deductions, you’ll be able to provide it without breaking a sweat.
4. Overlooking deductions — and cheating yourself
Sure, you may be guilty of underestimating how much you owe the IRS, but making the opposite mistake could be just as costly.
If you always take the standard deduction rather than itemizing deductions, for instance, you might be paying way more than you need to, and there’s a good chance it will go unnoticed.
If you feel certain you’re going to mess up on your taxes, hire a tax preparer or enrolled agent to tackle them instead. If they notice deductions you may have overlooked before, you could end up saving a lot of money.
It’s always a good idea to file taxes if you’re owed a refund. If you don’t file within three years, you may end up missing out on that money altogether, Krampf says.
“Don’t cheat the IRS,” he says. “But don’t cheat yourself, either.”
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4 Ways You Didn’t Know You Were Cheating on Your Taxes originally appeared on usnews.com
