Owing taxes is one thing, but when there are penalties and interest tacked on due to errors that could have been avoided, that’s painful. To save money, some people prefer to prepare their own taxes. If you know what you’re doing, that’s great; however, if you don’t, you could make costly errors. 8 common tax mistakes people make that cost them money are as follows:
Under-reporting income is a costly common mistake that self-employed individuals tend to make; however, some general taxpayers are guilty of doing this as well. Whether under-reporting income is really a mistake, well, that’s open to interpretation. So what is under-reporting of income? Under-reporting income is simply when a person does not report all of their income to the IRS. Why is under-reporting income bad? Simply put, doing this can cause you to have to pay more money to the IRS and state taxing agencies in the form of penalties and interest. In case you’re not aware of this, when you receive a Form W2 or a 1099-Misc, the payer mails a copy to the IRS and state taxing agency (if applicable). So, if you’re thinking about not reporting that 1099-Misc income for the year, think again. Under-reporting your income will eventually cost you.
Penalties imposed by the IRS for under-reporting your income will depend if the IRS considers the under-reporting to be negligence or tax fraud. A careless mistake on your tax return will cost you 20% of the additional tax due, whereas, if the under-reporting is considered fraud, you’re looking at a 75% penalty. Is it worth it to under-report income? With these percentages, I don’t think so.