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5 IRS Penalties You Want to Avoid

Updated for Tax Year 2016


OVERVIEW

Careless mistakes at tax time can leave people paying more money to the IRS. Those mistakes are avoidable through awareness of and strict adherence to the tax rules, including deadlines.


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, thanks to the penalties the IRS imposes. According to tax experts, some IRS penalties are for very common mistakes. Those mistakes are avoidable through awareness of and strict adherence to the tax rules, including deadlines.


"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."

- Wray Rives, Coppell, Texas-based certified public accountant


 

1. Late filing penalties

The first thing you must remember is the date April 15. Mark it on your calendar.

Coppell, Texas-based certified public accountant Wray Rives thinks you might need to circle the date in red.

“Nobody likes having to file their tax return, but we all know April 15 is the deadline to file, or at least request an extension,” said Rives. “Avoid being in so much angst over taxes that you just don’t file. The IRS knows you exist and they got 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 percent to your tax bill,” Rives said.

You also must sign your return, he noted.

“Forgetting to sign a tax return is the most common mistake taxpayers make,” Rives said. “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.” When you use tax software like TurboTax to e-file your tax return, the IRS assigns a PIN that acts as your electronic signature.

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 percent inaccuracy 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. According to the experts, math errors are very common on pen-and-paper 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.

The good news is, when you use TurboTax, we handle all the math and we guarantee that our calculations are 100% accurate.

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 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 percent 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.

Paul Lupo of Shelton, Connecticut-based Lupo & Associates cautions taxpayers against making common mistakes when it comes to claiming non-cash charitable contributions.

“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,” Lupo said. “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, he said, 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 percent inaccuracy penalty on top of the additional tax, and then the interest on the entire amount,” Lupo said.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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