With the new tax laws, people seem to be more confused than ever about what they should and shouldn’t do. Certain fundamentals still hold true, however. You must still tell the truth on your tax returns. Some tax payers fudge the numbers on purpose, and others are simply confused about the law. Here are a few mistakes that could land you in hot water:
- Claiming business expenses: Be careful here that you are not including personal purchases in your business deductions. Keep receipts and other supporting documents for any deductions you plan to take so that you can show that dinner out was with a legitimate customer and not your own entertainment, or that trip to Florida was directly related to your business and not a family vacation. You should pay all business expenses with a business account and not personal expenses. Keep the funds and accounts separate, and you will make your tax filing much easier.
- Claiming a tax credit: Do not claim tax credits that don’t apply to you. They may be tempting because they are a direct credit on your taxes, but the IRS can ask you for proof that you qualify. If you don’t have it, you can be in big trouble.
- Claiming your pet: Yes, people really do try to get away with this. Just because you treat your pet like a family member does not make them a dependent on your tax return. You must have a Social Security number or other documentation for your dependents, so the IRS is liable to catch on.
- Reporting your income: Many people work in a “gig” economy these days, which means they work multiple freelance-type jobs at once or over the course of the year. If you do this, you must be good at tracking your income sources, or hire someone to help you. You need to report every side-job or freelance gig you do. If you don’t think it counts, think again. And if you think the IRS won’t find out, you could find yourself sorely mistaken when the other party reports the payment, but you did not report the income.
- Failing to change with the times: The new tax laws are very different from past laws. The number of deductions has dropped for many people and small businesses. You may rely on tax filing software or a tax preparer to steer you in the right direction, but you must provide accurate information for that process to work.
As always, honesty is key with the IRS. That applies to honest mistakes, as well. If you realize you made a mistake, file an amended return right away. If you owe additional taxes, you might have to pay a 20 percent penalty. That penalty is much lower than the penalty for tax fraud, however.