Paper filing. Sloppy record keeping. Missing out on deductions. All these and more could mean you’re throwing money away. Here’s how to make your tax return as financially efficient as possible.
There are many ways for a tax return to be filed incorrectly. The IRS offers a list of the 9 most common errors which result in processing delays and hamper the chances of a quick refund. Those 9 can be classed as simple oversights; ones that are easy to overcome with some focus. This blog includes other potentially costly errors which take a little more thought to avoid.
Paper filing could be costing more than necessary
Tax filing is traditionally a chore. Today, going online to complete your returns digitally is not only a timesaver, it will also save you money.
More and more people are making this their go-to filing method. IRS figures show that 127,939,000 tax returns were e-filed for Tax Year 2018. Online filing may sidestep fees associated with having someone file your taxes for you and the cost of postage/a trip to the post office if you’ve been filing paper taxes yourself. It’s also a statistically safer option—costly tax form errors are around 21 percent more likely on paper compared to less than 1 percent on digital.
The IRS offers the Free File/Fillable Form program which allows taxpayers to prepare and file their federal individual income tax return for free using specially-created tax software. The Free File option applies to individuals whose personal income was under $66,000 for the tax year, while the Fillable Forms option is for those who made more than $66,000.
Using either of these systems could cut your expenses compared to paperwork. E-filing combined with Direct Deposit can make it easier and faster to claim and track any tax refunds. The Free File option also allows up to a six-month extension if taxpayers feel they won’t have their forms submitted in time.
That said, having a professional who knows the ins and outs of tax code will likely save you a lot more money than filing taxes on your own, however you do it.
Don’t forget to keep accurate financial records
Some commonsense steps in this area could save a lot of money later. Entrepreneurs risk steep misfiling fees and time-consuming audits if they don’t keep bank statements, invoices, payroll records, and receipts which will support any claims about income, expenses, credits, or deductions.
These records must be made easily available to the IRS and should be kept for at least three years (four in the case of employment records) after filing or payment, whichever is later. The IRS may audit you many years after a misfiling. In certain tax situations, they may have an indefinite period to call businesses and individuals to account.
Keep financial records and receipts in a digital format whenever possible This makes them harder to lose and easier to back up against damage. Watch this short IRS informational video for more information on proper record keeping.
Professionals could be entitled to deductions they’re not claiming
Have you been reluctant to claim a tax deduction for business expenses because you feared you’d be turned down or worse, audited?
This could mean you’re losing out on legitimate deductions which should be straightforward to claim if you’re keeping detailed financial records. Deductible business expenses can be anything the IRS deems ordinary (one commonly accepted in your line of work) and necessary (appropriate and helpful for your business).
Professionals who use a part of their home for business can claim a deduction, as can anyone using their vehicle for business travel as well as personal purposes. Publication 463 offers more information on how to make this deduction safely, as well as other expenses such as business meals.
Other types of deductible business expenses are:
- Federal, state, local, and foreign taxes directly attributable to your trade or business
- Employees’ pay
- Rent paid for the use of property you don’t own.
- Interest charged for the use of money you borrowed for business activities
- The ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession
Don’t neglect the proper security steps
More taxpayers filing online also makes more businesses and individuals vulnerable to cybercriminals. It’s true that digital recordkeeping is more effective against thieves than a filing cabinet full of receipts, but failure to safeguard digital data can see it stolen or corrupted—which could mean trouble with the IRS and losing out on refunds.
The information businesses retain and send to the IRS contains the sensitive data of themselves and their employees including social security numbers, home addresses, and bank details. Data thieves can use this data to commit tax-related identity theft and even steal refunds which rightfully belong to their victims.
There are several steps to take which help minimize digital tax risks. Installing personal firewalls and antimalware software can block cybercriminals, as can staying current with any updates or patches in your operating system.
Multi-factor authentication or encryption should be used to safeguard any place data is stored. At the very least, taxpayers should make all passwords related to sensitive data both unique and difficult to guess—and routinely change them.
The IRS recommends learning to recognize and avoid phishing emails, threatening calls, and texts from thieves posing as legitimate organizations such as your bank, credit card company, and even the IRS itself. Do not click on links or download attachments from unknown or suspicious emails. Professionals can learn more to keep their taxes safe here and by reviewing these further IRS guidelines.
These are just a few of the pitfalls which can cause you a headache at tax time. Provident CPA & Business Advisors are here to give our clients the complete picture on how to maximize tax efficiency and minimize risk.
Provident CPA & Business Advisors offer a wide range of services in tax, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.