After filing your tax return, the last thing you want is to receive a letter from the Internal Revenue Service notifying you that, after readjustments, your tax liability would be more than initially computed. If you're lucky, the IRS would recalculate various things like deductions and tax credits, and would show you how much money you should dole out. If misfortune visits your tax return, the agency might want to delve a little deeper into your paperwork – the kind of scenario that typically starts with a partial audit or a broad-scope fiscal investigation. Knowing errors that could cost you money is the smart thing to do – economically, fiscally, and legally speaking.
1, Paying Your Tax Bill with a Credit Card
Don't use your credit card to settle your tax bill – never. Even if you had a zero percent APR offer, you could end up paying more if you don't remit the full amount charged to the credit card company before the introductory period expires –say one year or 18 months. And we all know that your annual percentage rate would go up, sometimes drastically, after the introductory period, and you could be stuck with a sizable loan amount at a high interest rate. If you're having problems paying your tax bill, it often is better to find an agreement with the IRS, whose interest rates, albeit high, are not as exorbitant as rates proposed by some credit card companies.
2, Falling Prey to Identity Theft
Pay no mind to those emails that (rightfully) landed in your junk folder but look so professional, you feel tempted to give them more credibility that they really deserve. Discard that email you read one Saturday morning, in which someone somewhere was seeking your financial help to claim a tax refund that allegedly is worth millions of dollars. Besides ignoring bogus emails and other written correspondence or phone calls, talking to the right people also is important. Report ID theft events to the IRS or law enforcement as soon as possible, and follow authorities' instructions to the letter.
3, Not Disclosing a Foreign Account
Hiding a foreign account, with the implicit purpose of concealing income, is a crime. Don't let anyone coax you into opening an offshore account to hide assets from the government, as you could face big trouble if authorities find out and initiate litigation. Not disclosing a foreign account falls within the scope of tax evasion, which is a felony, unlike tax avoidance, which seeks to minimize your taxes while complying with the law.
4, Not Filing
File your tax return even if you earned no income during the previous year or your earnings fell below the filing requirement. It would cost you nothing to file, especially if you do it online, but you could always grab a few dollars here and there from the government by way of tax credits. That way, you keep your records up-to-date with the government. Some organizations – think lenders, insurance companies, property management institutions as well as state and local unemployment agencies – also ask for tax returns for the previous two or three years when studying applications for things as diverse as credit, insurance and tenancy.
5, Ignoring IRS Mail
Not opening IRS mail, or filing it in the most hidden places in your house, would not make the letter's content go away. So summon up the courage to open that letter, read the (supposedly dreadful) content, and try to make sense of it. Contact your tax accountant or attorney if you don't understand information in the letter or legalese the IRS has used. Knowing early on what the IRS wants from you can be a money saver, especially if the agency decides to penalize you and start charging, say, 1% per day until it hears from you.
6, Filing a Fake Joint Return
If you file a joint tax return with a tax cheat, you could be liable if the IRS finds out and initiates a legal action. It is against the law to knowingly file a false tax return or to associate yourself with an enterprise that aims to defraud the government. So, the bottom line is: don't do it. And if you do it unknowingly, contact the IRS and your state's tax authorities right away. You can also reach out to your tax accountant to amend the fiscal return and fix whatever inaccuracies were inputted on the initial return.
7, Not Applying for the Earned Income Tax Credit
If you are on the lower to middle side on the income spectrum, filing the Earned Income Tax Credit can bring some cash into your coffers, making you laugh all the way to the bank. If you have low income, the credit lowers your tax bill by an amount ranging from $3,000 to $5,000 – and that applies even if you use one of the simpler tax forms, such as Form 1040-EZ.
8, Failing to Deduct Employment Search Expense
Note that you can deduct money spent on job searches – that is, everything from resume copying and postage to gas and parking fees paid while driving to and fro prospective employers' locales. If you were unemployed at any point during the previous year, or still are jobless, be methodical and deduct all job search costs to reduce your overall tax bill and fatten your refund check.
9, Applying for a Refund Anticipation Loan
Stay away from refund anticipation loans, most – if not all – of which generally constitute a rip-off, says Elisa G., a certified financial planner who for years has studied personal finance and the effects of tax refund on individuals' savings levels. A typical refund anticipation loan can charge as much as 30% interest, and what you may not know is that the fast refund doesn't come from the IRS but is money the tax-preparing company advanced to you. Unless you face excruciating financial circumstances and cannot wait for two or three weeks until the IRS sends you your refund, or don't have any relative or friend who can lend you some cash for up to 21 days, I would say go ahead and apply for a refund anticipation loan.
Following specific techniques and doing your fiscal homework in advance can help you avoid tax errors that could cost you money. The question is not how to avoid paying taxes, but how to strategically and methodically use the Tax Code to claim all expenses the Code allows, to minimize your overall fiscal debt and to increase your refund. Tax errors you should avoid include staying clear of identity thieves, not filing, failing to deduct job search costs, and applying for a refund anticipation loan.