Not Reporting All of Your Income
Filing your tax return early will speed your refund, and it may protect you from tax-return fraud because a criminal can’t file a return in your name and pocket your refund if you’ve already submitted your return. But if you overlook a Form 1099 from your bank or brokerage firm, you’ll probably hear from the IRS. The agency compares statements it receives from financial institutions, employers and other entities with your tax return, and if it discovers a mismatch, you could owe interest on the amount you should have paid and possibly a late-filing penalty, too.Misreporting a Qualified Charitable Distribution (QCD)
QCDs allow individuals who are 70 1/2 or older to contribute money directly from their IRA to a qualified charity, potentially satisfying all or part of their required minimum distribution. The contribution isn’t deductible, but the distribution will count toward your required minimum distribution and will be excluded from your taxable income. For 2024, individuals could contribute up to $105,000 through a QCD (for 2025, the maximum is $108,000).However, reporting a QCD on your tax return can be tricky because the Form 1099-R you receive from your financial institution won’t reflect the QCD. When filling out your 2024 Form 1040 (or 1040-SR), include on line-4a the total amount of distributions reported on Form 1099-R. Then subtract the amount that was transferred directly to charity and report the remainder (even if it’s $0) on line 4b. Write “QCD” next to line 4b so the IRS knows why the numbers don’t match. If you’re using tax software, a drop-down box for line-4b should give you the option to click “QCD.” You should also obtain documentation from the charity in case you receive inquiries from the IRS, says Miklos Ringbauer, a certified public accountant in Los Angeles.
Failing to File a Tax Return
If you have a tax bill you can’t afford to pay, the worst thing you can do is nothing. The IRS penalty for failing to file a tax return is 5 percent of the amount you owe per month, up to a maximum of 25 percent of the unpaid balance. “That can devastate a person,” Ringbauer says.
Hiring an Unscrupulous Tax Preparer
The availability of sophisticated tax software has made it easy for inexperienced or dishonest individuals to create a website and designate themselves as tax preparers, even if they know little or nothing about the tax code. The IRS has warned taxpayers to be on the lookout for “ghost preparers”—individuals who encourage taxpayers to claim credits and benefits for which they don’t qualify, charge fees based on a percentage of the refund, then disappear after the return is filed. According to the IRS, other fraudsters pose as tax preparers to steal taxpayers’ identities.When you sign your tax return, you’re responsible for the information on the return—no matter who prepared it—so it’s in your best interest to hire a preparer you can trust. Start by looking for a preparer who is credentialed, including certified public accountants, enrolled agents and attorneys. CPAs are licensed by state boards of accountancy, have studied accounting at a college or university, and have passed a rigorous exam. You can get a list of local certified public accountants from your state’s CPA society. Enrolled agents, who are licensed to appear before the IRS, must pass a rigorous test and meet annual continuing-education requirements. To locate an enrolled agent in your area, go to www.naea.org. Attorneys are licensed and regulated by state courts and/or state bar associations. They must take continuing-education classes and satisfy professional ethics requirements.
The IRS provides a resource you can use to search for preparers in your area who hold professional credentials, as well as individuals who aren’t CPAs, enrolled agents or attorneys but have completed a certain number of continuing-education hours. (Find it at https://irs.treasury.gov/rpo/rpo.jsf)
