Three Common Tax Mistakes People Make
When it gets challenging to file your taxes, hiring a tax professional is one of the best options you have. A tax professional keeps up with the tax laws and related changes each and every year, so you don’t have to. Moreover, they will help eliminate errors and ensure your returns are prepared correctly.
However, in a rush to meet deadlines when filing your taxes, errors of judgments are committed that lead to claiming ineligible expenses and misreporting. To help you avoid such errors, Vilensky & Company, LLC has compiled three of the most common mistakes people make on their taxes.
1. Failing to report all income on tax return
In certain cases, taxpayers think that money received for services rendered is not taxable. In some cases, investment income is not taxable. Furthermore, taxpayers may fail to properly report income to the IRS even if it isn’t taxable. Properly reporting income, whether it’s taxable or not, is important. The IRS receives 1099 Information Returns on taxpayers, which shows income has been received by that particular taxpayer. What the IRS does not know with some of the items that are reported on that 1099, is whether the income is taxable or not. If the taxpayer fails to show why certain income is not taxable (i.e., amount received is a return to basis) then you can bet the IRS will show the income as taxable and stick the taxpayer with a tax bill. The burden of proof of why the income is not taxable then will fall on the taxpayer. Vilensky & Company, LLC can show you how to avoid this mistake. The taxpayer should respond to the notice with an explanation and documentation on why the income is not taxable and should not ignore the notice. We understand those notices and can help.
2. Reporting travel and meals as business expenses
The IRS has recently taken a position to audit taxpayers with large amounts of travel and meal expenses reported on their tax returns. The IRS compares these expenses to the industry standards and flags tax returns for review whenever the expense amounts fall outside those normal standards. The taxpayer then has to show why the expenses qualify as ‘Ordinary’ and ‘Necessary’.
Meals are limited to 50% of the total expense, but if the taxpayer eats at expensive restaurants and can’t show the IRS why this meal should be allowed as an expense (i.e., taking a customer out for customer relationship purposes), the IRS will disallow it. Additionally, the taxpayer should keep all receipts with memos written stating the purposes of the trip or meal for all expenses for travel and meals. This is because it is much harder to go down memory lane to try and recollect the purpose of such a trip or meals a year or two down the road.
3. Failing to consult a tax professional
If a taxpayer files their own taxes and is not eligible for any credits besides the CTC or EIC, they may pay only the tax due and not a dollar over. However, as a tax accountant, I have seen many taxpayers lose out on credits because they do not understand how the credits are calculated, how income limitation works, and how to plan during the tax year to avoid disqualifying for those credits. If a taxpayer makes enough money that they feel they can just give it to the US Treasury and let the government use it as they please, then, by all means, go ahead and file your own tax returns. However, if you’re not sure whether you are paying too much in taxes or missing out on credits, then see a tax professional for advice.
Moreover, taxpayers shouldn’t wait until the end of the year to talk to an EA or a CPA. The taxpayer must seek a professional early in the year so they can make a plan for the taxpayer to prevent the loss of tax credits. Taxpayers should ensure they are dealing with a tax accountant and not just a tax preparer. Tax accountants understand the tax law and know how to apply it. A tax preparer only knows how to plug the numbers into their software. They do not understand how the tax return is compiled, and they just enter the information and hope for the best. Next time ask your tax preparer to explain how everything flows to the main Federal form 1040. If they can explain it, then they have a good understanding of items on that particular return. If they cannot, it means they use software to decide whether you are entitled to any other credit or whether you can lower your tax liability. If you’re not sure, then come in and see us at Vilensky & Company, LLC. It would be worth your time and money.
To avoid making other tax-related mistakes, reach out to the experts at Vilensky & Company, LLC, Idaho’s individual or small business tax accountant and bookkeeper. I offer a diverse set of services to those seeking financial and tax help with their small to midsize business or personal finances and tax needs. My services include IRS tax problem resolution, business tax preparation, individual tax preparation, forensic accounting services, accounting and bookkeeping services, payroll services, business classification services, and QuickBooks online support services.