Are you ready for tax season? Have you got all your information together to prepare your return? After a delay caused by the passage of the Fiscal Cliff legislation, the IRS is ready to start accepting tax returns submitted electronically on January 30th.
With changes like the fiscal cliff deal and the 1099-K, everyone seems a little nervous preparing their return or talking to their accountant. But with skilled accountants available, as well as top notch software, the preparation process has gotten much easier. However, you may be asking yourself “What if I do something wrong? And what are the penalties for that screw up?”
Underreporting Penalty (Bad!)
The first penalty the IRS could assess is a 20% penalty if you were negligent in reporting the amount of income earned during the year, or if you substantially understated the amont that you owed in taxes. Being negligent is when you get very careless when reporting the amounts you put on your return. You will incur this penalty if you can’t corroborate a deduction or you don’t report all of your income to the IRS.
So, how do you avoid this penalty? When you report a deduction, make sure you have documentation that clearly shows what the item purchased or charges and the amount is easily determined. To make sure you report all of your income, check through all your bank statements, PayPal reports, etc. to be sure everything deposited is listed on your tax return. Or better yet, you could just keep track of all of your income with Outright!
Purposeful Underreporting Penalty (Worse!)
So being negligent basically means you just got sloppy in preparing your return. However, if you deliberately underreported your income to the IRS, you can be assessed a fine of 75% of the amount of the tax deficiency that was caused by your underreporting of revenue. While less than 2% of the returns audited get hit with this penalty, it is not a risk you want to take as you could be charged with tax fraud (which is rare but a possibility to consider). So how do you avoid this penalty? As with avoiding a negligence penalty, check through your deposits on your bank statements and the revenue reported in your accounting software (such as Outright) and make sure that you can tie these to the amount of income you reported on your return.
Late Filing Penalty
Every year on April 15th you see the news stories about the long lines of people at the post office trying to mail their returns before midnight. Ever wonder what the hurry is all about? The IRS will assess a penalty of 0.5 % to 1% per month of the tax due on the amount you owe on a return when it is not paid on time. The best to avoid the penalty is to get your return completed on time, so get started putting together your information now.
Cash Reporting
As your business becomes more successful, you may start receiving large cash payments. Once you start receiving cash payments of $10,000 or more, you will need to fill out form 8300 and submit it to the IRS. You will need to report a cash payment if it:
- Is received in the course of your business, and it is received from a single payer
- For over $10,000
The IRS is concerned about payments received as:
- One lump sum
- Two or more payments that are related and exceed $10,000
- Payments that are part of a single transaction (or two or more related transactions) that are received over 12 months totaling more than $10,000
Failure to file this form in a timely manner (within 15 days after the cash was received) could lead to a penalty of $100. The best way to avoid this penalty is be aware that you need to file this form, and be on the lookout for any transactions that could require you to file the form.
Preparing and paying your taxes is hard enough. Don’t make life more difficult by incurring a penalty. A reputable accountant can help you avoid these penalties, as well as help you through any other tax issues you may face.
Worried? Read more about audits and track your finances agains our “Audit Predictor.”
In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.
The author, Chris Peden, CPA, CMA, CFM, has over 15 years of experience with helping people and companies with organizing and making sense of their finance information, as well as meeting their regulatory compliance requirements. He is also available as a freelance blogger if you need an article on finance, accounting or taxes for your blog. He can be reached at chrispedencpa@yahoo.com.
