From omitted income to incorrect deductions, these accounting errors can lead to big trouble with the IRS.
Every year, Americans procrastinate on their taxes, hurrying through them at the last minute and failing to catch a myriad of accounting mistakes. Many assume the IRS targets only wealthy taxpayers and large corporate entities with audits. This is not true, and even small errors can lead to the hassle of auditing for everyday employees, independent contractors, and small business owners.
The following are three common accounting mistakes that lead to significant issues with the IRS:
1. Incorrect Application of Deductions
Itemized deductions can garner hundreds, even thousands of dollars in savings over the standard deduction. They’re risky, however, and failure to properly calculate deductions could increase the risk of an audit. Large deductions catch IRS notice, particularly if they are not proportionate to your income.
It’s acceptable to claim large deductions if they’re valid — especially as you can incur major expenses in the first year or two of freelancing or running a small business — but it’s imperative to have the documentation to back them up if the IRS comes calling. This is doubly true of businesses that regularly report losses, as the IRS may assume that the business owner purposefully takes excessive deductions.
Deduction mistakes are particularly common among those who have home offices. The IRS maintains very stringent requirements regarding home office deductions. Unfortunately, areas used for personal matters do not also qualify for home office deductions.
2. Omitting Income Information
It’s tempting to avoid including some information on a tax return, such as that side hustle that barely brought in any profit. After all, the IRS won’t make much money on it, nor is it inclined to know if it’s missing, right? This is a problematic approach, because entities that have paid you will most likely report those payments in the form of a 1099. Keep in mind that jobs aren’t the only source of income you must claim on your tax return — you may also receive a 1099-INT or other forms highlighting interest, which also require reporting.
3. Basic Computation-Based Accounting Errors
Number crunching is not everybody’s forte, and sadly, after double and triple-checking, some filers may still have computational errors on their returns. Often, errors are as simple as adding one too many digits to a particular entry. It’s easy to enter data into the wrong box — especially given how many line items are in the typical form. Errors are most common among deductions and exemptions; these are still worth itemizing, but take great care when entering data. Math errors are more likely to occur when rushing through tax filing at the last minute, so it’s extra important to get started well ahead of time and look tax returns over carefully before filing.
Even seemingly minor accounting mistakes could lead to huge trouble down the road. It’s worth your time to work with the trusted tax team at Incompass. We will guide you through the filing process and minimize your risk of receiving an audit. Contact us today at (916) 974-9393 to get started.