California residents may be penalized by the IRS if it determines that they owe more taxes than they paid on their annual returns. The government may assess a negligence penalty for up to 20% of the amount underpaid.
The IRS penalizes taxpayers if it determines that the underpayment is because they disregarded rules or regulations. Although the agency audits only a small percentage of tax returns, there are some red flags that can help you avoid being among them.
Schedule C deductions
If you have a sole proprietorship, you likely need to complete and attach a Schedule C form with your tax returns. Self-employed taxpayers typically use this when they are getting their business off the ground.
Keeping accurate records, including receipts, is critical, and you can use this form for reporting both losses and income. Sole proprietors who claim excessive deductions, such as meals and travel, or who don’t include all of their income may find themselves under an IRS audit.
Early payout from retirement accounts
IRAs, 401(k)s and similar accounts can help you save for life after you retire, in a tax-advantaged way. If you withdraw funds from these accounts before the requisite age, you must pay a penalty of up to 10%. However, the IRS has a chart listing exempt withdrawals, such as total or permanent disability and significant medical expenses.
Home office deductions, incorrectly reporting the Health Premium Tax Credit and various other issues can result in errors on your taxes. If the government audits your returns and finds you guilty of tax negligence, it may open an IRS investigation that includes several other years’ returns. Depending on the circumstances, you may face additional tax penalties and/or criminal charges.