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2013 CCH Whole Ball of Tax
Tax Mistakes to Avoid: CCH Looks at Common Blunders Tripping Up Taxpayers
(RIVERWOODS, ILL., January 2013) – Navigating through all of the available tax deductions and qualifying credits can be challenging, especially for taxpayers preparing their own returns. Honest mistakes do happen, but anyone looking to exaggerate a few details or bend the rules in their financial favor could be looking at serious penalties such as tax evasion charges, fines and even time in prison, says CCH. CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com), examines some common mistakes taxpayers should know to avoid before possibly winding up in hot water with the IRS.
“Guessing is never a good strategy if you’re unsure about a tax break, deduction or new rules regarding specific taxpayer benefits,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “IRS investigators will dig deep to determine if a mistake was simply an oversight that can be easily corrected or an intentional attempt to avoid paying taxes.”
Among the frequent errors to avoid when preparing tax forms include:
- Not paying taxes on unemployment, wages, tips or other income. Under the American Recovery and Reinvestment Act of 2009 (ARRA), the first $2,400 in unemployment benefits was excluded only from 2009 income. Since then, beneficiaries are expected to pay taxes on all benefits they received. Likewise, workers are expected to report all their income from work – whether it comes in the form of wages or tips. All investment income, including interest, dividends and capital gains, also is income and has its own tax ramifications.
- Not paying taxes on household help. Taxpayers who employ a nanny or other household workers are required to withhold and pay FICA taxes if cash wages totaled $1,800 or more in 2012. They also have to report and pay the required employment taxes for domestic employees on Schedule H, Household Employment Taxes, with the tax amount then transferred to the appropriate line on their Form 1040 or 1040A.
- Not reporting gifts given over $13,000. When someone receives a gift, its value is excludable from their gross income, meaning it’s not taxable to them. However, if they later sell it or receive any other income from the gift, that amount is taxable.
Taxpayers giving gifts in excess of $13,000 as a single filer or $26,000 as a split gift by joint filers have two options to satisfy their tax obligation: Pay taxes on the amount above the limit or apply it against their lifetime gift tax exemption (which for 2012 is $5,120,000 and for 2013 falls to $1,000,000 without Congressional action). The tax on gifts for 2012 ranges from 18 percent on taxable gifts up to $10,000 to 35 percent on taxable gifts of more than $500,000. Not reporting the gift is considered tax evasion.
“As a single filer, if you gave your niece a car valued at $20,000 last year, you need to decide if you want to pay taxes on the $7,000 in excess of the allowable gift tax or have that amount applied to your lifetime gift tax exemption,” said Luscombe. “Your niece owes no taxes on receiving the gift. However, if she sells it a few years from now, she owes taxes on any gain on the sale amount.”
- Inflating the value of charitable donations. The IRS expects people donating items to qualified charitable organizations to use fair market value in determining what each item is worth. For non-cash donations of more than $500, a written description of the donated property must also be furnished and non-cash donations of more than $5,000 must be appraised. Additionally, cash donations of any amount require proof, such as a cancelled check, credit card statement or receipt from the charity. Contributions of $250 or more also require a letter from the organization specifying the name of the donor, the amount given and the date received.
- Exaggerating business expenses. The IRS pays close attention to fraudulent tax abuses such as inflating business expenses or attempting to write-off personal and family expenses under the guise of a home-based business, where deductions are clearly invalid or where a business doesn’t exist.
For expenses to qualify as business deductions they must be ordinary and necessary expenses paid or incurred in carrying on a trade or business. Taxpayers must have proof to legitimize business deductions such as receipts. If they cannot show proof of expenses, they will be required to pay back taxes and interest on non-substantiated deductions. The IRS may take other measures depending upon the extent of the abuse.
Sole proprietorships may claim business expenses on Schedule C, Profit or Loss from Business. Partnerships and joint ventures generally report expenses on Form 1065 or 1065-B.
- Under-withholding of taxes. Generally, income tax follows a pay-as-you-go approach, meaning taxpayers must pay taxes on income they earn during the year it’s earned. This is done through withholding or by paying estimated taxes on a quarterly basis. Under-withholding results in owing back taxes as well as a possible penalty, which is typically interest on the amount under-withheld.
A simple way to avoid under-withholding is making sure you pay at least as much in withholdings and estimated taxes as you paid in taxes the previous year (110 percent of prior year if your adjusted gross income exceeds $150,000). Another way is to pay 90 percent of what is owed for the current year through withholdings and estimated taxes.
- Not paying taxes on income earned abroad or from offshore accounts. Taxpayers must report worldwide income, within and outside of the United States, on their tax returns.
That includes income from foreign countries and applies even if you didn’t receive Forms W-2, 1099 or their foreign equivalents. Those who don’t report all taxable income from overseas business transactions or offshore accounts could face civil and criminal penalties.
- Not reporting income from gambling or illegal schemes. Form 1040, line 21 and Schedule A, line 28 of the tax return are a bit of a catch-all for reporting various financial gains and losses. Whether you had a lucky night at the casino or financially benefited from an illegal transaction, such as a Ponzi scheme, embezzlement or other types of fraud, line 21 is the taxpayer’s opportunity to tell all. For those who choose not to report gambling winnings or ill-gotten gains, they could be facing income tax evasion charges down the road.
Self-employed taxpayers are most likely to fall into under-withholding, particularly those who have highly fluctuating incomes that make accurate estimating difficult.
- Not filing a tax return. Ever since the enactment of the federal income tax in 1913, there have been many legal challenges to the system that have fallen short. Most people are required to file a federal income tax return.
Income thresholds for those who must file range based on age and filing status. For single filers under age 65 for 2012, returns must be filed if they earn $9,750; returns must be filed for married couples under age 65 filing jointly if their income is $19,500 or more. Not filing a tax return when required is considered income tax evasion with penalties including paying back taxes, interest, possible fines and potentially serving a prison sentence in the most serious cases
- Other common mistakes on tax returns:
- Failing to include or use correct Social Security numbers;
- Claiming ineligible dependents – must meet legal definition of a dependent; and
- Failing to check liability on whether the alternative minimum tax applies.
2013 Filing Deadline Back to April 15
Last year, taxpayers had a couple of extra days to file their returns because the usual April 15 deadline fell on a weekend. For 2013, April 15 falls on a Tuesday and that is the deadline filing date. Taxpayers can request a filing extension until October 15, but they must file that request and still pay any tax due (using IRS Form 4868) by April 15.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. Celebrating its 100th anniversary in 2013, CCH has served tax, accounting and business professionals since 1913. Among its market-leading solutions are the ProSystem fx® Suite, CCH Integrator™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.