UPDATE: The Treasury recently announced tax changes and updates in response to COVID-19, updates include an extension of the first installment of tax year 2020 quarterly estimated taxes to July 15, 2020. Some information in this post however requires additional IRS guidance and may require updating. We will update as soon as we receive additional guidance. Please see the latest information on tax deadlines and updates related to COVID-19 here.
Nobody sets out at tax time to figure out how to pay more money to the IRS. But careless mistakes can leave many people doing just that. Some IRS penalties are for very common mistakes. Those mistakes are avoidable through awareness of and strict adherence to the tax rules, including deadlines.
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1. Late filing penalties
The first thing you must remember is the date July 15, 2020 for the 2019 tax year. Mark it on your calendar, you may even want to circle the date in red.
Nobody likes having to file their tax return, but we all know there is a deadline to file, or at least to request a tax extension. Avoid being in so much angst over taxes that you just don’t file. The IRS knows you exist and they get copies of all those W-2s and 1099s you received in the mail, so they know you made some money last year.
Late filing penalties can add 25% to your tax bill. You also must sign your return. Forgetting to sign a tax return is the most common mistake taxpayers make. The IRS won’t accept your tax return if it is not signed, and that is just the same as not filing it at all.
2. A tale of two mileage rates
If you’re self-employed, and you intend to deduct all the wear and tear you put on your car last year getting the job done, it has to be done according to the new rules. You need to be accurate in your record keeping to avoid penalties.
Should your creative bookkeeping set off red flags to IRS employees, you will have to provide a journal detailing every mile you claimed on your return. You'll also have to turn over receipts for all other questions they may have on your entire tax return.
If you are unable to prove your side, there is a 25% accuracy penalty on top of the additional tax and then the interest on the entire amount.
3. Penalties for math errors
If you’re not good at math, then you had better sharpen your skills if you are preparing your taxes by hand. Math errors are very common on pen-and-paper tax returns, so check and re-check your math.
If the math error results in you paying less tax than you should, the IRS is likely to require that you pay the additional amount of taxes owed plus interest accrued since the due date of the return.
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4. Home office deduction penalties
If you run a home daycare service, use part of your home as an office, or designate a closet or other area to store inventory, you may confidently take a deduction for your home office.
The key is that you use your home office ‘exclusively and regularly’ as your principal place of business. You should only deduct the exact area(s) you use exclusively for business, so if your office doubles as a spare bedroom, you can only deduct the portion of the room used for business.
If the IRS determines the taxpayer does not qualify for the home office tax deduction, the damage can be twofold.
- First, because the deduction is taken on Schedule C, it may raise the taxpayer’s taxable income.
- Second, if the reduction in expenses leads to more income on the Schedule C, that amount is also subject to self-employment tax, which is 15.3% in most years.
5. Some not-so-charitable penalties for charitable donations
They say it’s always better to give than to receive. In the case of income tax filing that is true. Charitable contributions can lead to additional tax deductions.
In donating clothing and other goods to a charitable organization, the donor must receive an itemized slip from the organization listing what has been donated and the condition of the items. There’s also a place where the person should be putting down a value and then signing the slip.
If you are selected for an audit, the deduction may be denied because there’s nothing specific listed on the slip, like the condition of the items and their value. If denied, the filer will have to pay the additional taxes and perhaps a 25% accuracy penalty on top of the additional tax, and then the interest on the entire amount.
In addition, the deduction may also be denied if the charitable contribution does not meet IRS guidelines for a qualified donation or charity.