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6 Common Tax Mistakes That Can Land You in Trouble with the IRS
You'd be hard-pressed to find someone out there willing to argue against the idea that taxes are complicated. There's a reason why most people dread it on some level every time April rolls around. Making mistakes is commonplace, yes - but it's also critical to understand that not all issues are created equally.
In fact, some common tax mistakes are more than just a "small problem." They could actually land you in trouble with the IRS if you're not careful, which is why they should be avoided at all costs.
What is Tax Fraud? Breaking Things Down
As the term implies, tax fraud is a deception that is "deliberately practiced" when filing your state or federal income taxes. In other words, making a mistake that ends up saving you money or putting you in an otherwise beneficial situation is one thing. Withholding information or filling out forms incorrectly and knowingly to get those same benefits are something else entirely.
What happens if you commit tax fraud will vary depending on the severity of the situation. Generally, you could get assessed a penalty of up to 75% of the amount that you failed to pay due to the fraud in question. Likewise, you could get fined up to $100,000 and be subject to three years in federal prison.
Improper Child Tax Credit Claims
The Child Tax Credit is a tax break that is meant to go with families with qualifying children. That money can be essential for food, clothes, housing, and other essential items. "Qualifying" is certainly the operative word in that sentence - if your family situation doesn't meet the criteria, you cannot claim the Child Tax Credit and if you have done so it is in error. End of story.
Failing to Report All of Your Income
This is an issue that has become increasingly common over the last few years as the "gig economy" began to grow in popularity. Someone might fully report all the income they bring in from their traditional 9-to-5 job... but may not have been as forthcoming about all that money they were making ride-sharing on the weekends. Or, they might set up an eBay store that generates a substantial amount of income that they think they don't have to report because no formal 1099 had been issued in the past.
Improperly Claiming Tax Deductions
One common example of improperly claiming tax deductions would take the form of the home office deduction. Some people might measure their home office incorrectly on accident, arriving at a larger surface area in a way that ultimately makes the room seem bigger than it is. This would make the deductions you're entitled to larger as well.
But if you say that you have an office that is used exclusively for business in your home and you just flat out don't, that's intentional deception and it would fall under the description of tax fraud.
Incorrectly Claiming the Earned Income Tax Credit
Similar in concept to the Child Tax Credit, the Earned Income Tax Credit is designed to help provide people with the extra income they need for essential purchases. In 2023 (meaning for the taxes that you will file in 2024), the credit will vary between $600 and $7,430 depending on the filing status you select and the number of children that you have.
This is another one of those tax credits where the IRS is very, very clear about who qualifies, who doesn't, and what amounts people are entitled to. If you have one qualifying child, for example, the maximum amount of the credit is $3,995. This is with a maximum adjusted gross income (both for single and head-of-household filers) of $46,560. If you don't fall into the rigidly defined brackets regarding who can claim the credit and who can't, you shouldn't do so or you run the risk of tax fraud.
Failing to Report Crypto Income
Especially over the last few years, people who fail to report cryptocurrency income on their taxes has become a major issue. There has been a lot of talk about whether this "virtual currency" qualifies as income at all. The IRS has decided that it does, which means that it is - whether you like it or not.
If you don't report transactions on your income taxes and you get hit with an IRS audit, not only will you have to pay interest on the money you owe. You will probably have to deal with penalties and potentially even criminal charges in some extreme cases.
Cryptocurrency can be very volatile, yes - which is why if you want to make sure that everything is being filed correctly with the IRS, you should not hesitate to enlist the help of a professional to do so. Getting help from a pro with your taxes can help you avoid all of these situations moving forward.
To find out more information about all the common tax mistakes that can get you in trouble with the IRS, or to speak to someone about your own needs in a bit more detail, please don't delay - contact us today.
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