Remember Enron? The large US energy company collapsed in 2001 due to widespread accounting fraud and tax evasion. Its shareholders lost $74 billion, and its employees lost billions in pension benefits. Enron’s downfall was primarily due to widespread accounting fraud and deceptive financial practices. The company manipulated its financial statements to portray inflated profits and hide mounting debt. Enron used special purpose entities (SPEs) to keep debt off its books and artificially boost its stock price. These SPEs were used to conceal losses and make Enron’s financial condition appear healthier than it actually was.
To a much lesser degree, and most of the time unintentional due to lack of knowledge, taxpayers have made serious mistakes that cost them thousands of dollars. These mistakes could have been easily avoided had they hired professional tax preparers or did more research about the tax laws. Let’s go over the mistakes, so we can all learn from them:
- I wrongly calculated my business expenses and ended up with a $12,000 tax bill. I had a side business for which I filed a Schedule C. The business made about $6,000 in a particular year, however I reported close to $30,000 expenses. I supposed I should have seen this coming, but I didn’t at the time. The IRS sent me a letter inquiring about the business expenses. When I reviewed them, I realized I made a grave mistake. I had been claiming all my home expenses for my home office, where I should have claimed only the expenses associated to my home office. The IRS disallowed most of my business expenses, slapped a huge underpayment penalty on top of it, and as a cherry on top – a hefty interest.
- We sold our home before the two year mark and ended up with capital gains tax. To make matters worse, it was just a few weeks before the two year mark. Had we waited a few weeks, we could have excluded our gains under Sec 121, in which gain from sale of principal residence under $250,000 (for single filers) and $500,000 (for taxpayers filing married filing jointly) are not taxed.
- I didn’t do rollover correctly and ended up with taxable retirement income. At the time I was clueless about financial and tax matters. Looking back, I should have dedicated a week reading up about this and avoid thousands of dollars of IRS tax bill. I lost my job and thought I could cash out my retirement funds from the company. Little did I know that not only the funds would be reported as income, but I’d be paying 10% penalty for taking it out of the retirement account early. I wish I’ve read more.
- I “forgot” to report my income. I realized now that tidy recordkeeping is key to avoiding paying Uncle Sam more than you should. I had a side business that paid me income reported in 1099-NEC forms. I didn’t keep them organized and didn’t take them to my tax preparer to include in my income. I ended up accusing my tax preparer for unprofessional work, even though it was my fault. My tax preparer fired me and I ended up with a huge tax bill. Have I mentioned that I forgot to pay estimated taxes? Yes, because I didn’t have the slightest idea about this and had never told my tax preparer about my side job. Lesson learned, the hard way.
- We lost money by forgetting to report capital loss carryover from several years ago. We had a big capital loss several years ago but we totally forgot to report it in subsequent years afterwards. Now, we have capital gains that we could have used the loss to offset the gains. But, since we never reported it, it’s now forfeited.
- We didn’t keep track on how many years we had been claiming Education Credits for our kids. The IRS disallowed the credits and we owed $5,000. Since then, we know that American Opportunity Credits can only be claimed for four years. The issue is, our kids were in college spanning almost five years. We could have save ourselves major headache had we known about this and keep track of the timeline.
There are so many ways a taxpayers could make mistakes. If you made a mistake and would like to know how to fix it, worry not – a tax professional can help to minimize the damage.
- Home Office Deduction: Who Really Qualifies? (Simple, Friendly Guide)
- Losing Your Tax Refund: How It Happens (and How to Make Sure It Doesn’t Happen to You)
- The Tax Deadline Is Looming—but I’m Not Ready. What Are My Options?
- Moving from California to Texas? How the Move Affects Your Taxes (Plain-English Guide)
- Moving States? How That Affects Your Taxes (A Simple, Real-Life Guide)