Taxes are complicated, so it’s no wonder that everyone makes mistakes from time to time. But some actions go beyond incorrect arithmetic or thinking something is deductible when it’s not. Some actions can cost you tax breaks you might otherwise have been entitled to. And some actions can land you in serious trouble with the IRS, triggering steep civil penalties and, in some cases, criminal penalties. Here are actions to always avoid:
Not filing returns. If you meet the annual-filing threshold for your filing status, you must file an income-tax return, even if you don’t owe any money. If you don’t file, the IRS can complete a tax return, and may say you owe taxes. If no return is filed, the IRS has an unlimited amount of time to take action with the blank tax year (the year for which you didn’t file a return).
Fake documentation. Once you’re called for an audit, it won’t help you to retroactively create the records you should have been maintaining all along. For example, the IRS has been known to use experts for detecting fake car-mileage logs. Faking documents can amount to a crime. Even if there’s no fraud involved, sloppy documents can be costly. In one case, mileage logs that had questionable and missing entries resulted in the complete disallowance of a couple’s deduction for car use (Moore, TC Summary Opinion 2012-16).
Claiming breaks you’re not entitled to. A report from the Treasury Inspector General for Tax administration found that 21 to 26 percent of earned income tax credit (EITC) payments were issued improperly, totaling $13.3 to $15.6 billion. This red flag has put the IRS on the alert to bogus tax-credit claims. The EITC isn’t the only tax write-off that’s abused. There are frequent examples of false charitable deductions and dependency exemptions, as well as “creative” deductions (e.g., treating a veterinarian’s bill for a family pet as a personal medical expense).
Failing to report income. Intentional omissions of income can result in stiff penalties when discovered. And the IRS has more time than usual—six years instead of three years—to audit a return that omits more than 25 percent of gross income.
Concealing foreign accounts. If you have foreign bank or investment accounts, you are required to report them annually if the aggregate value of all such accounts exceeds $10,000 at any time during the year. Some individuals have concealed these accounts to avoid reporting the income they earn from them. The penalties can be severe, and the IRS now has the help of many foreign banks and financial institutions to help them track down U.S. depositors and investors.
Misreporting information. Being careful can avoid attracting IRS scrutiny to your return; make sure that any tax information reported to you on a Form 1099, W-2, K-1, or other information return is reported properly on your tax return. Mismatching will be detected by IRS computers and a letter will be generated if additional taxes are owed. When omissions are significant, the IRS may choose the more-painful audit procedure.
Ignoring substantiation rules. If you don’t have required receipts, diaries and logs, acknowledgments, etc.—you can lose deductions and credits to which you would otherwise be entitled.
Avoiding these income-tax sins will undoubtedly lead to a smooth sailing during the tax-filing season.
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or email@example.com.
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