No one looks forward to tax season, especially if you know you are going to owe money. If you are in the boat, you want to make sure you avoid any penalties that may force you to cough up even more cash. Here are some of the most common penalties and how to avoid them.
Not Filing on Time
The date to file for 2017 will be April 17th, 2018. If you owe money but don’t file a return or get an extension you will accrue a 5% penalty on the tax amount due every month until you get them paid. A common mistake is that people forget to sign their tax return. It will not be accepted if it is not signed, which is same thing as not filing. Make sure to double check that you have signed your tac return to avoid making this simple but costly mistake.
Underpayment of Estimated Taxes
The U.S. tax system is a pay as you go system. This means that you pay taxes on any money you earn as you receive it. If you work for an employer, this is usually handled by them. They will typically withhold them from your paycheck to pay the amount due. If you are self-employed, and you expect to owe more than $1,000 at the end of year, you are required to pay quarterly taxes. Whatever the amount you end up making by year’s end, you won’t pay any penalties “if the estimated tax you pay is at least the smaller of 90 percent of your total tax due for the current year, or 100 percent of the tax you paid the previous year, or 110 percent if you’re a high-income taxpayer (those with adjusted gross incomes of more than $150,000 or $75,000 for married couples filing separate returns).”
Failure to Provide Accurate Record Keeping for Mileage
If you are self-employed and intend to deduct any repairs and mileage you may have put on your car to get your job completed, you need to make sure that all of your records are as accurate as possible. Keep a journal of detailing the miles you drove for business as well as filing away any receipts for other questions that may come up. If you are unable to prove your side if the IRS comes after you, there will be a 25% inaccuracy penalty coupled with the additional tax and interest on the entire amount.
Planning Ahead to Avoid Penalties
All of the IRS penalties are avoidable if you just do some planning ahead. Research your situation or hire a professional to handle your taxes. At the end of the day, paying a little extra money to have experienced hands tackle your specific tax issues may just be worth it for it will most likely save you from paying even more in penalties. More often than not, strong record keeping habits, knowing the key deadlines, and having a basic understanding of your filing situation, such as if you are a 1099, will set you up for success.