Avoiding the Top Ten Mistakes Taxpayers Make
Knowing the pitfalls of many is often the best step to ensure that you do not fall prey to otherwise might be an easy to make common mistake. By staying away from these most often repeated mistakes you will avoid much of the pain which will otherwise will be created. The most frequently committed mistakes are:
1. Tax Planning. Many forget the value of a well thought out plan. Remember that failing to plan is analogous to planning to fail. Just as you would not set out on a journey to a distant city without a good road map first; so should we consider and carefully contemplate what lies ahead tax-wise. This will enable us to take the surprise out of our year-end taxes while also allowing us the ability to legally reduce our overall tax debt during the year while there are still great options to explore during the year. Just as a soldier can change the outcome of a war while it is still being fought so can proper planning do much to determine what will otherwise exist at year-end.
2. Deadlines. The whole of the tax code with its rules and filing deadlines are both date specific as to both filing and payment. Failure to abide by these can add substantially to your tax bill with additional penalties and interest for late payment but also assessments for the late filing of returns. Being aware of these deadlines and the correct forms to be filed and monies to be paid is your first and best defense in ensuring peaceful co-existence with the IRS.
3. Never Underestimate the Value. For those you go it alone you are risking financial suicide of not only your personal taxes for the year but also the financial security of your family and business. For example, if you have a cold you will probably be best served with over the counter medicines. However if you are suffering from a more serious malady such as a heart attack, you had better get to a qualified physician fast. So is it similarly important to have a CPA to help you with all of your serious tax issues. Those who got it alone who have an audit, a business of their own, or have other family investing and financial planning needs are prone to disaster. It is always best to never underestimate the value of a good business CPA as their fees will frequently we substantially loss than those the IRS will determine and assess.
4. False Beliefs. Many taxpayers have the mistaken belief that an extension to file is an extension to pay. Since World War II, the Internal Revenue Service tax system has been a pay as you go system requiring taxpayers to file and pay by certain deadlines. Although the IRS does offer some extensions for the filing of returns, there is never the ability not to pay until the final extension lapses. Therefore it is critical to pay your taxes as monies are earned to avoid unnecessary assessments.
5. Reporting Stock Sales. Frequently taxpayers do not track or have the ability to re-create what they originally paid for a stock. This information is needed as tax law allows those selling of the stock to offset against the sales price against the original purchase price of a stock. This is critical for determining the related gain or loss on the stocks sale and reporting. It is prudent to continue to keep books, records, and statements for all of your outstanding stock so that at any time you can adequately report and be aware of a specific original stocks basis.
6. Ask the Box. In this day and time computers have done much to make our jobs easier and indeed to make us more efficient. However, just as speed dialing gave us the ability to dial wrong numbers faster so does tax software allow us to mathematically accurately process inaccurately prepared returns. Just as a tool in the hands of its master may do wonderful and skillful things, so should taxpayers be cautious in the use of tax software without adequate and proper knowledge of tax law. Often to the laymen, tax questions will appear to be dealing with one issue while in reality they are truly asking another. Failure to understand all of the questions asked and attendant nuances and complexities might well result in errors in both filings and payments.
7. Recordkeeping. Keeping adequate and well organized documents and records is an essential part of properly preparing your return. Foremost, absent good records you are most apt to miss deductions that otherwise you would be legally entitled to. Staying current on your accounting is an critical component of this process as often expenses may be missed if you wait until the end of the year to try to pull it all together. If you are a business owner being sure to reimburse any business expenses each and every month you might have paid personally, is the first best step to ensure that you track and record every legal deduction.
8. Mileage Logs. Whether you own your personal car and use it for business, whether you lease your business car, or if your business owns the car that you drive, you are required by tax law to have a by-day log to support business miles. Many fall prey to this miss-conception falsely believing that this requirement does not apply to them. It is most convenient to track business miles on ones calendar so that you are constantly reminded of not only where you have been but also the need for adequate reporting.
9. Ad Valorem taxes. Many taxpayers fail to keep in mind that Ad Valorem taxes on their personal vehicles, boats, trailers, motorcycles, and motor homes is an available tax deduction. One of the best first steps in the preparation of a given years taxes, is to first review the taxes of prior years to ensure both completeness of prior returns and that every legal deduction is being considered and assimilated.
10. K-1 Reporting. A K-1 is an attachment to a S Corporation, Partnership, LLC, or LLP tax return, which indicates each respective partners pro-rata portion of the business operating results. Although the tax information and reporting on a K-1 is very specific and exacting, they, by themselves, will not reveal all of the important tax information and knowledge needed for the proper preparation of a return. For example tax losses of an S Corporation cannot personally be deducted by a shareholder unless they have sufficient tax basis to do so. Similarly, it is possible to have a tax profit on a K-1 which might be legally be offset against prior year losses which were suspended and rolled forward. A keen awareness of tax law and the proper use of a good CPA will help alleviate much of this pain.
John Dillard is a Speaker/Author and Certified Public Accountant (All Rights Reserved). To See how he takes Christ along with him to work visit http://www.hiscpa.com/ (An Atlanta Christian CPA firm) and for his latest book Overcoming Life's 9/11's: Job's Journey visit http://www.john-dillard.com/