With a reported 70,000 pages, there seems to be only one word for the Internal Revenue Code. "The tax code is very onerous," says Karl Byrd, Vice President of Security Ballew Wealth Management. And that may be an understatement for many taxpayers. Unfortunately, while trying to unravel the mysteries of their income tax documents, some people make mistakes that run from mildly inconvenient to incredibly costly. These are five of the most expensive mistakes taxpayers can make.
Keeping spotty records
Byrd relates a recent IRS case in which an individual made a sizeable charitable contribution. However, the government ruled it could not be deducted from the individual's income taxes because a receipt for the contribution had not been provided. "Make sure you have very good documentation," says Byrd. "For example, if you are self-employed [and claiming travel expenses], keep a mileage log." In the event of an audit, you may be able to recreate necessary documents or substantiate with other records, but it is easier and less stressful to have the right documentation in the first place.
Missing valuable credits and deductions
The tax code includes provisions for deductions and credits that may reduce or even eliminate your tax liability. These cover everything from work expenses to student loan interest to child care costs. Missing a deduction or credit could mean missing money in your pocket. Byrd notes a common way to miss deductions or credits is to use tax preparation software that imports data from the previous year's return. While convenient, some taxpayers may forget to manually enter new information such as the addition of a child.
Making careless mistakes on returns
Careless mistakes are among the most common reasons for a return to be rejected by the IRS. These include misspelled names, incorrect Social Security numbers and math errors. Most may result only in the inconvenience of a delayed refund, but some can also be costly mistakes. For example, Byrd notes if a return is not signed and dated, it is not considered filed by the IRS. If you are submitting your paperwork at the last minute and forget to sign, you could get hit with late fees and penalties as a result.
Failing to change withholding or make estimated payments
If your income has changed during the course of the year and/or if you incur significant capital gains - such as the sale of a second home - your tax burden may jump as well. To avoid an unpleasant surprise at tax time, be sure to review your tax withholdings and make changes as necessary. The IRS's safe harbor provision prevents penalties from being assessed so long as you made estimated tax payments or had withholdings at least equal to what you owed in taxes last year. However, to be sure, you may want to consider using form 1040 ES to make an estimated payment should you be on the receiving end of a large amount of taxable income.
Ignoring the IRS and failing to seek competent advice
Finally, when the IRS comes calling, you can't wish them away.