Learn from our tax mistakes over the years, plus find out what happens if you make a mistake on your tax return.
What happens if you make a mistake on your tax return?
I haven’t had to guess, because over the last 22 years that I’ve been in charge of filing taxes, I’ve made a mistake here and there.
Below, I’m spilling the beans on either mistakes my own household has made (which would be me – as I file our taxes), or mistakes my friends/family have made around taxes.
I’m also including what happened as a result, and the solution (in case you find yourself in the same boat!).
What Happens if You Make a Mistake on Your Tax Return?
What happens if you make a mistake filing your tax return really depends on what the mistake is.
Let me give you five different examples, based on five real-life mistakes either I’ve made, or my friends/family have made.
Mistake #1: Owed Over $1,000 to the IRS on April 15th
Did you know that the threshold for owing a penalty on unpaid taxes is just $1,000?
We didn’t. Until about 7 years ago when we went over that threshold due to my business income…and got a letter from the IRS that we owed a penalty.
Fortunately for us, the penalty was just $11. But if we had owed a whole lot more than $1,100? Well, that extra penalty could’ve hurt a whole lot more.
Solution: After this happened, I paid the penalty and then changed the way I did my business taxes. Instead of waiting until the end of the year to file them, I started filing estimated quarterly taxes four times per year and paying an estimated quarterly tax each time. We haven’t been surprised with a penalty, since!
Mistake #2: Claimed an Adult Child as a Dependent
Someone in our family actually claimed an adult child on their taxes because they assumed that their child was not going to claim themselves in their first year out of college.
And guess what? This was quickly flagged in the IRS system (they can automatically flag the same social security number being claimed twice), and a letter was issued.
This actually happens more than you would think – for example, when two divorced parents mistakenly claim the same child as a dependent.
Solution: Fortunately, this was a very easy mistake to fix. The incorrect person fixed their tax return and resubmitted it, and then the correct person was able to claim themselves. Also, you should know that this can trigger an audit for one or both of the tax returns involved. In my family’s case? It did not, thankfully.
Mistake #3: Ignored the IRS for Several Years
My husband, Paul, started talking to his friend from the military again after about 7 years. After telling his buddy that his wife writes about personal finance, Paul learned that his friend was basically hiding financial assets from the IRS and had not filed returns for close to 5 years (FYI: this is never, ever, recommended – do not attempt to hide money or assets from the IRS, and definitely do not fail to file your return, especially when you can file for an extension to get the paperwork in).
Solution: By the time I spoke with him, his situation was way out of the realm of fixable by everyday people (even money nerds, such as myself). Which is why I suggested that he work with someone like Community Tax.
This group of CPAs, attorneys, and enrolled agents have expertise in dealing with these case-by-case situations. And since this friend didn’t have much money at the time? It was really helpful to be able to send him somewhere that could give him a free tax analysis, where they could then talk to him about his best tax resolutions moving forward.
Mark my words – this guy was in a pretty bad and complicated situation that would take quite a while to work itself out. But, getting professional help from people who could hold his hand through the process of sorting everything out – starting with them filing a Tax Authorization Information Form 8821 on his behalf to understand what was what – was the best decision he could have made.
Mistake #4: Sold an Investment for a Profit without Understanding the Tax Consequences
This was a really silly mistake – but hey, it’s nice to know that even us personal finance people make them sometimes too, right?
I sold an investment about 8 years ago for a small profit. What I didn’t realize at the time was that the sale of the investment is what triggered the taxable event (a capital gains tax, since I made a profit), and not the act of withdrawing that money from the brokerage account into my checking or savings account.
Solution: Come tax season when that document came in the mail, I called my brokerage firm to ask them – which is how I learned that the sale is what triggers the tax document, not the withdrawal of the money out of the brokerage firm – and withdrew some of the profits needed to pay the tax bill.
Mistake #5: Not Separating Business Money from Personal Money
When I started my side business 11 years ago (you’re on it, now – Frugal Confessions!), I didn’t know you were supposed to have separate checking and savings business accounts from your personal accounts.
Super important!
While this doesn’t have immediate filing consequences, it certainly can trigger a tax return audit from the IRS (among other issues), so it’s a mistake worth mentioning.
Solution: About 9 years ago, I formally separated my business money from my personal money, as well as filed as an LLC. Now, all of my income and expenses for my business come out of my business checking and savings, and all of my personal expenses and our household income are dealt with in our personal checking and savings accounts. Much cleaner!
I hope by getting over some embarrassment and actually sharing my personal tax filing mistakes with you today, you’re able to avoid these issues yourself. Remember that if you’re ever in doubt about something, don’t just send in your tax return anyway. Either call the IRS directly to ask your question, or get some professional help to answer your questions. It can save headaches, later!
This post is sponsored by Community Tax and includes tracking links. For more information about tracking links and how to opt-out, please visit All About Do Not Track prior to clicking any links found in this post.
Amanda L Grossman
Latest posts by Amanda L Grossman (see all)
- 5 Surprising Ways to Cut Household Costs (Saved us over $1,412!) - March 11, 2024
- The No Spend Challenge Guide (Money Game-Changing Tool) - January 31, 2024
- 47 Seasonal Jobs in Alaska with Housing (Hiring for this Summer) - December 1, 2023
