There are several common mistakes that can occur when you file your tax return
Tanweer Habib
December 27, 2022
For Latest acts, ordinance and tax rates
1. Failing to provide complete and accurate documentation: It is important to provide all of the necessary documentation and information to support your tax return. If you are unable to provide complete and accurate documentation, the auditor may disallow certain deductions or credits, which could result in additional taxes being owed.
Few examples of documentation that may be required to support your tax return:
- Receipts and invoices: If you are claiming deductions for business expenses or charitable donations, you should keep receipts and invoices to support these claims.
- Bank and credit card statements: Bank and credit card statements may be required to support claims for business expenses or charitable donations.
- Pay stubs: You should provide pay stubs to support any wage or salary income that you report on your tax return.
- Other Source Income: If you receive income from sources other than wages or salaries, such as investment income or self-employment income, you should provide that you receive to support these claims.
2. Claiming inappropriate deductions or credits: Claiming deductions or credits that you are not entitled to can be a red flag for the auditor and may result in additional taxes being owed. Here are few examples of claiming inappropriate deductions or credits:
- Claiming a home office deduction for a space that is not used exclusively for business purposes.
- Claiming a deduction for business expenses that are not directly related to your business or are not ordinary and necessary expenses.
- Claiming a charitable donation deduction for a donation that does not meet the necessary requirements or for which you do not have proper documentation.
- Claiming deductions for personal expenses, such as clothing or personal travel, as business expenses.
It is important to carefully review the rules for claiming deductions and credits to ensure that you are only claiming those for which you are eligible. If you are unsure about whether a deduction or credit is appropriate, it is a good idea to consult with a tax professional.
3. Failing to report all income: It is important to report all income, whether it is from wages, self-employment, or other sources. Failing to report all income could result in additional taxes being owed.
Here are few examples of sources of income that you may be required to report on your tax return:
- Wages and salaries: You must report all wages, salaries, and other compensation you receive from your employer as income. This includes tips and bonuses, as well as any compensation, such as severance pay.
- Self-employment income: If you are self-employed, you must report all of your business income and expenses on your tax return. This includes income from freelance work, consulting, or any other type of self-employment activity.
- Investment income: You must report any income you receive from investments, such as interest, dividends, and capital gains.
- Rent: If you receive rental income from a property you own, you must report this income on your tax return.
- Pension and annuity income: You must report any income you receive from a pension or annuity on your tax return.
If you are unsure about whether a particular source of income should be reported on your tax return, it is a good idea to consult with a tax professional.
4. Misclassifying employees as independent contractors: Misclassifying employees as independent contractors can result in penalties for failing to withhold and pay employment taxes.
Here are a few examples of how employees may be misclassified as independent contractors:
- Hiring workers as independent contractors when they should be classified as employees: If you control how and when a worker performs their duties, they are likely an employee rather than an independent contractor.
- Using independent contractor agreements to classify workers as independent contractors: Simply having a worker sign an independent contractor agreement does not necessarily make them an independent contractor. The worker’s actual duties and the level of control you have over their work must be considered.
- Failing to withhold and pay employment taxes for workers classified as independent contractors: If you classify a worker as an independent contractor, you are not responsible for withholding and paying employment taxes for them. However, if the worker is later determined to be an employee, you may be liable for these taxes.
4. Not disclosing offshore accounts: If you have financial interests in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, you may be required to report this information on your tax return. Failing to disclose offshore accounts can result in significant penalties.
Foreign financial accounts that you may be required to disclose:
- Foreign bank accounts: If you have a bank account in a foreign country, you may be required to disclose this account on your tax return. This includes checking and savings accounts, as well as certificates of deposit.
- Foreign brokerage accounts: If you have a brokerage account with a foreign financial institution, you may be required to disclose this account on your tax return.
- Foreign mutual funds: If you have investments in foreign mutual funds, you may be required to disclose this investment on your tax return.
- Foreign trusts: If you have an interest in a foreign trust, you may be required to disclose this interest on your tax return.
It is important for taxpayers to understand their rights and obligations when it comes to filing taxes and participating in a tax audit. To ensure that you are in compliance with all applicable tax laws, it is recommended that you contact a qualified tax professional for assistance. A qualified tax professional can help you navigate the complexities of the tax code and ensure that you are taking advantage of all available deductions and credits, while minimizing any potential tax liability.
