6 Common Tax Mistakes That Can Land You in Trouble with the IRS
- What is tax fraud?
- Learn who can claim the Child Tax Credit.
- Don’t forget to report all of your income (even gig income!)
- Be careful with tax deductions.
- Learn more about the Earned Income Tax Credit.
- Make sure you report crypto income.
We all know the US tax code is complicated. There's a reason why most people dread doing their taxes every time April rolls around. And everyone makes mistakes, yes – but you must also understand that not all tax mistakes are equal.
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. So, please avoid them at all costs.
What is Tax Fraud? Breaking Things Down
As the term implies, tax fraud is a deception "deliberately practiced" when filing your state or federal tax. 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 is something else entirely.
What happens if you commit tax fraud will vary depending on the severity of the situation. Generally, you could receive a penalty of up to 100% of the amount that you failed to pay due to the fraud in question. Likewise, you could receive a fine of up to $250,000 if an individual, $500,000 if a corporation and be subject to five years in federal prison.
Improper Child Tax Credit Claims
The Child Tax Credit is a tax break meant to go to 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. 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. A larger room equals a larger deduction.
But if you say that you have an office used exclusively for business in your home and you just flat out don't, you have given IRS a potential opening to claim 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.
The IRS makes it pretty clear who qualifies, who doesn't, and what amounts people can expect to receive. If you have one qualifying child, for example, the maximum amount of the credit equals $3,995. This includes 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, then don’t claim it or you run the risk of tax fraud at the worst, but at least you risk substantial additional tax, penalties, and interest.
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 – whether you like it or not.
If you don't report transactions when required on your income taxes and get hit with an IRS audit, you will have to pay interest on the money owed. You may even have to deal with penalties and potentially even criminal charges in some extreme cases.
Cryptocurrency can be very volatile. If you want to make sure you are filing correctly, you should not hesitate to enlist the help of a professional. Getting help from a pro with your taxes can help you avoid all of these tax mistakes moving forward.
Want more information about the common tax mistakes that can get you in trouble with the IRS? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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