Tax Mistakes That Could Cost Thousands
When my pay was direct-deposited into my checking account every two weeks while I was working my first full-time freelance job, I’d think, “Wow, that’s a decent amount of money. I can totally live off this!”
No one ever told me (and I never bothered to ask) why my paycheck seemed so large, so I lived it up for an entire year—eating out, going to plays, buying new clothes and taking trips.
Then April rolled around: tax time. In all fairness, I knew that I hadn’t been paying taxes on the money I was making as a freelancer. I just had no idea how much I actually should have been setting aside from each paycheck. I now know that I should have been saving at least 33% to 35% of every paycheck to put toward taxes. Hindsight … you know what they say.
In the end, I owed a little over $3,000. My accountant practically cried when she gave me the news—and a full-blown panic attack.
Well, it turns out that I’m not the only one befuddled by taxes—especially now that the new tax laws have been put in place for 2013. We found three readers to share their own horror stories in the hopes that maybe, just maybe, it will never happen to you.
The $40K Bill Bombshell
In 2010, Heidi Saucedo’s husband was working in Egypt for two months. While he was away, Saucedo received an envelope from the IRS, which revealed a bill for $40,000.
“After I picked myself up off the floor, I had to contact the hubby … by Facebook chat,” she says. “Can you imagine going through all the back-and-forth required for that via chat?”
The problem was that Heidi and her husband had not filed a tax return in five years, since money was tight while she stayed home with their two children. “I just didn’t understand that we could possibly owe nothing—I thought we would be charged for everything we owned,” Saucedo says. “I knew this was foolish, but we were living paycheck to paycheck, and we were too proud to ask for assistance.”
Her husband was also working under a 1099—meaning that he wasn’t a full-time employee, so he was taxed at the end of the year instead of out of every paycheck. “Apparently, I had ‘known’ this (my husband says that we discussed it), but to this day, I swear I had no clue,” Saucedo says.
After using TurboTax to figure out the tax deductions that hadn’t been included in that $40,000 bill (like standard deductions and the child tax credit), it turned out that they didn’t owe anything. “At the time, I chose not to go to a professional since the gist of the letter from the IRS was that all we needed to do was file our taxes,” Saucedo says. “I was pretty overwhelmed, and I didn’t have any money to pay a CPA, so I signed up for TurboTax.”
“The good thing was that when I began the search for anything and everything that I could get my hands on to rectify the situation,” Saucedo adds, “I realized that I love doing taxes. Never again will there be an unfiled return!”
The $12,000 Marital Mix-Up
In late 2008, Gayle Lynn Falkenthal, APR, received a letter from the IRS informing her that they had not received any of her quarterly estimated tax payments for her independent consultant business—and she was behind by $12,000.
“I was shocked!” says Falkenthal (shown at right). “I checked my bank account and all of the checks had been cashed by the IRS. I informed them, provided copies of the checks and the IRS opened an investigation.”
Meanwhile, Falkenthal’s ex-husband (which whom she, luckily, remained on good terms) mentioned to her that he’d received a direct deposit from the U.S. Treasury for a little over $10,000, and he couldn’t imagine why.
The IRS had credited Falkenthal’s payments to her ex-husband’s tax obligations under his Social Security number, as opposed to hers. It turns out that this kind of mix-up is pretty common the first year after a taxpayer divorces.
“The wife could be making estimated tax payments in the year subsequent to the divorce using coupons based on the year prior—her married year,” says Thomas D. Fisher, CPA LLC. “Those coupons contain both Social Security numbers, and even if she writes her number on the check, the IRS processes the payment with the information shown on the voucher—and always credits the payment to the first Social Security number shown, which is usually the husband’s.”
To avoid this problem, Fisher suggests double-checking that the 1040ES Estimated Tax Payment Vouchers are made with only your name and Social Security number following a divorce.
“My CPA instructed me on how to compose a letter for my ex-husband and me to jointly sign and send, acknowledging his receipt of the money in error,” Falkenthal explains. “Finally, after another six months, the IRS acknowledged the error. My husband sent a check to the IRS for the amount sent to him, which was properly applied to my tax obligation, and then I finally received the stimulus check that the IRS had seized before sorting everything out. It was a measly $200. I spent it on a new pair of boots, just because.”
The moral of this story? “It pays to remain friendly with your ex,” says Falkenthal.
The Miscounted Dependents
Last year, Jose Vera thought that everything was totally fine when he filed his own taxes online. “I have two dependents, so I figured, ‘Okay, I’ll just add their social security numbers,’ ” Vera recalls.
Then the waiting began.
Vera let a full two months pass before he decided to give the tax preparation company a call. “It turns out that I had missed some information for one of the dependents, and they had been trying to email me about it, but they had the wrong address on file,” Vera explains.
In the end, he’d made a mistake about the date of birth of one of his dependents, and he ended up only being able to claim one dependent instead of two—which lost him a little over $1,100. “I almost threw my iPad into the ocean [when I found out],” Vera says. “But I figured that I’d already lost enough money for one day.”
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