Top 5 Common Tax Filing Mistakes and How to Avoid Them

The entire tax filing process involves ever changing rules and regulations. It remains a source of stress for many. 

While some worry about the legalities, others are concerned about numbers or missing crucial information. Regardless, the smallest mishap can lead to the biggest concerns. This can include fines for incomplete or inaccurate returns, audits, missed refunds, and more. 

Well, that is where professional tax filing services like ours are impactful. Let us look into some common tax filing mistakes and how to avoid them.

What are the most common tax filing mistakes? How to avoid them?

When preparing and filing your taxes, you cannot afford mistakes. Though unintentional, it can cause significant concerns downstream. Some of the most common mistakes to pay attention to and avoid are:

A. Incomplete and inaccurate records

Lack or mismanagement of records increases the chances of mistakes in audits and tax filings. For this reason businesses end up understating or overstating their tax responsibilities. Ultimately, this leads to varied significant consequences. Thus, keeping track of income and expenses and having all financial records up to date is essential.

How to prevent this?

To prevent this, you can:

• Keep track of receipts, bank statements, and invoices in a way that makes them easily accessible.
• Hire a bookkeeper, invest in a good accounting software, or reliable tax preparation services.
• Establish a backup system for all financial data to secure it from theft or system failure.
• Record and maintain all transactions consistently and accurately.
• Keep an eye on your account(s) regularly to get ahead of discrepancies in the early stages or life cycle of your business.
  

B. Combining personal and business expenses

Putting together your business and personal expenses isn't a great idea. This can lead to inaccurate tax deductions, raising alerts from the taxing authorities. This action ultimately leads to penalties. Not only this, but comingling personal and business expenses pierces your corporate veil, meaning that the court can disregard the separate identity of your business, holding you liable for legal issues, business debts, and other corporate actions.

Therefore, it is best to have separate business credit accounts and checking accounts for all Company expenses to ensure easy tracking and accurate records.

How to prevent it?

To prevent this, you can:

• Provide accurate and clear financial records or reports. 
• Maintain separate credit cards and checking accounts for professional and personal use.
• Claim tax deductions only on legal business activities.
• Do not use business funds for personal use or vice versa.

C. Claiming excessive or wrong ITC

Trying to claim excessive or wrong ITC (Input Tax Credit) without accurate and complete documents can attract unnecessary penalties and audits. Thus, it is essential to make sure all the claims have relevant and authorized tax invoices and meet General Goods and Services Tax (GST) conditions.

How to prevent this?

To prevent this, you can:

• Claim ITC for personal expenses and not business expenses.
• Make sure every ITC is supported by relevant GST invoices.
• Do not claim input tax credit on blocked purchases or commodities without uploading invoice support.
• Keep a regular check on the ITC claims to ensure accuracy and compliance.
• Cross check ITC claims against filed returns to avoid discrepancies.
• Track ITC using GST compliant accounting or financial management software.
  

D. Missing available credits & deductions

Many often miss tax credits and eligible deductions. Ultimately, ending up with higher tax payments. Thus, keeping a regular check on expenses and staying informed about necessary benefits is crucial to save taxes and plan your finances in a better way.

How to prevent this?

To prevent this, you can:

• Keep a record of all the documents supporting tax claims during audits or filing.
• Consult professional tax advisors such as Edom & Co. CPAs to understand deductions relevant to your case.
• Record all Company expenses, including research & development, software purchases, business travel, and training in detail.
• Stay updated on available credits and deductions by reading up on current tax laws.
  

E. Misidentification of employees as contractors

Many businesses often label their employees as contractors. However, that is not the best decision to reduce your tax obligations. This action can backfire both financially and legally. Therefore, understanding and adhering to appropriate classification is crucial for fair employment practices and compliance.

How to prevent this?

To prevent this, you can:

• Define worker contracts, responsibilities, and roles clearly.
• Acknowledge the legal differences between independent contractors and employees.
• Assess factors such as payment terms, work control, and provision of benefits or tools.
• Consult a professional tax advisor or HR specialist to understand proper classification.
• Follow checklists or guidelines provided by taxing authorities. 

Frequently Asked Questions

Q. What is the deadline to file a tax return in the United States?

According to the IRS (Internal Revenue Service), US citizens must file their tax return before April 15 every year. It is important to note that if the due date falls on a weekend, i.e., Saturday or Sunday, and on legal holidays, the date is automatically delayed to the next business date.

Q. What happens if I miss the tax filing due date?

If you miss filing your tax return before or on the due date, the IRS can charge interest, and late filing or payment penalties.

Q. Should I hire a professional or file taxes myself?

The decision to hire a professional or file taxes yourself depends on several factors, including the overall tax situation and your comfort level with the tax filing process. 

If your tax return is not complicated and you are confident about the entire process, feel free to file it yourself. However, if this is not the case and the process appears to be complex, it is best to hire professionals such as Edom & Co. CPAs.

Conclusion

Tax filing is no rocket science. However, it requires careful consideration of many factors to avoid unnecessary penalties and delays. Staying organized and updated with all the information will ensure a smooth filing process and maximum refunds. 

Contact us today for Business Advisory, Accounting, Tax and Payroll Management Services!