The tax law is constantly changing. While Congress talks about tax simplification, the complexity of the law continues to escalate. The law has become so complex that even those who specialize in tax preparation and tax planning find it challenging to keep abreast of all the changes. How is it possible for those who self-prepare their returns or tax preparation firms who don’t specialize in taxation to keep abreast of the effective dates, phase-outs, and tax planning opportunities? Traps for the unwary, for both individuals and business owners, include . . .
Individuals:
- Failure to report Foreign Bank and Financial Accounts (FBAR). These accounts include the holding of cash in foreign bank accounts, foreign life insurance policies and other foreign assets where the cumulative values of all such accounts exceed $10,000 during any day of the taxable year. The penalties for failure to report these accounts are VERY significant and may require representation by legal counsel to navigate through the IRS appeals process to mitigate the penalties.
- Self-prepared returns where the individual has limited knowledge of the tax law & IRS regulations and is principally relying upon the tax software program to compute the proper tax liability. If your return consists of more than a W-2 and claiming the standard deduction, you owe it to yourself and family to obtain a quote to have your return prepared by a tax professional. Remember the adage “You get what you pay for.”
- Engaging a tax preparer to prepare a tax return and the preparer lacks a tax background and does not specialize in taxes. In these cases, it is the preparer who is relying upon the tax software program to compute the proper tax liability. If you are using a professional tax preparer, do not hesitate to inquiry about their experience and credentials.
- Working with a tax preparer who prepares more returns than he can handle and who as a matter of practice needs to files extensions of time to file because of his caseload. This practice should not be acceptable to a person who has sent his tax information to the preparer well in advance of the April 15 due date and can result in the imposition of IRS penalties and interest.
- Failure to file a tax return because of the lack of funds to pay the taxes due will subject the taxpayer to a late filing penalty that can be 25% of the tax due.
- Self-employed individuals or owners of S Corporations and partnerships who have taxable business income but fail to file estimated tax payments.
- Not filing a tax return on time and then requesting a line of credit or loan from a lender. This will delay the approval of the loan because the lender will request a copy of the taxpayer’s tax returns and will independently verify those filings with the IRS.
- Failure to adequately document tax transactions and lose valuable tax deductions if audited.
- Listening to and following incorrect tax advice freely given by family, friends and co-workers who are uninformed about the tax law.
- Planning for retirement or making major financial decisions without first consulting with your tax professional to maximize tax savings opportunities.
- Ignoring the advice of your tax professional and not working with your tax professional throughout the tax year.
- Ignoring IRS tax notices and failing to immediately send the notices to your tax professional.
Business Owners:
- An employer misclassifying an employee as an independent contractor. Misclassification is subject to reviews by IRS, U.S. Department of Labor, and the state’s Dept. of Labor. Misclassification will subject employer to penalties for late payment of payroll taxes, interest, and possible benefit plan violations.
- Failure to register or qualify to do business in a state outside of the company’s base of operations where the company has established nexus and thus not filing state returns in those states. Since no return was filed in those other states, the statute of limitations to assess past due taxes, interest and penalties continues indefinitely.
- Failure to adequately document tax transactions resulting in loss tax deductions.
- Failure to pay a reasonable salary to a shareholder/employee of an S Corporation.
- Failure to file partnership and S Corporation returns when due resulting in a $195 penalty per month or portion of a month for late filing assessed to each partner or shareholder up to 12 months.
- Keeping your accounting and tax records current throughout the tax year.
- Ignoring the advice of your tax professional and failure to work with your tax professional throughout the tax year to minimize taxes and increase cash flows.
Note: Because everyone’s tax situation is different, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
You can also schedule a consultation at Click Here. To learn more about various tax and business services, visit Tax Preparation Services and Small Business Accounting Services
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