Whether you file your own taxes or run a small business, you want to pay as little as possible in income tax every year. Unfortunately, eagerness to reduce your tax liabilities could lead to you making big mistakes in how you prepare your tax return.
The wrong kinds of mistakes could make you look like someone intentionally trying to evade their obligations to the Internal Revenue Service (IRS). Any of the three mistakes below, even if they are innocent mistakes, could trigger an audit or lead to criminal charges against you.
Exaggerating or falsely claiming deductions
There are numerous deductions and tax breaks available for business owners and individual taxpayers. Qualifying for those deductions could reduce how much you have to pay the federal government at the end of the tax year.
However, it is important that you don’t exaggerate certain financial activities, like how much you donated to the local charity secondhand shop, to reach a deduction threshold. It’s also important that you don’t claim a deduction without documentation proving that you qualify for it.
Not reporting digital or foreign assets
People have long opened international bank accounts as a means of hiding assets from creditors, spouses or taxing authorities. However, modern banking transparency laws make it easier than ever before for the IRS to track down your offshore accounts and hold you accountable for your undisclosed assets.
These days, many people use a similar approach to cryptocurrency. They buy up digital assets like Bitcoin because they want to avoid paying tax on them. Although you may not have to pay tax on the value of any cryptocurrency you own, you do have to pay capital gains tax when you sell your cryptocurrency for a profit.
Failing to report every source of income
Many modern workers make income in numerous ways. They may have an actual job, as well as a small business. They could also have a few side hustles that involve them working as an independent contractor. Choosing not to report certain projects taken on as a contractor might seem like a way to avoid paying unnecessary taxes, but if you get caught not reporting that income, there could be major penalties.
Learning about common tax mistakes and also common forms of tax fraud could help you avoid or better respond to allegations of tax evasion.