Quick quiz: How well can you explain the tax codes related to your personal return? If you’re unsure, don’t worry, you’re not alone. Though most of us file taxes every year, we still seem to have very little knowledge of tax laws. In fact, a new study reveals that most Americans would fail a tax basics quiz related to personal finance issues.
Here, at Rocket Lawyer, our goal is to demystify the “scary” world of law. So in this two-part series, Christopher Johnson, a Rocket Lawyer OnCall® tax attorney, helps navigate us through all the legal jargon that surrounds tax laws. He also answers the most frequently asked tax questions he gets from clients and sheds light on the most common mistakes that can get you in trouble.
Let’s start with the basics. Where do people commonly make a mistake?
Estimated taxes. Most people understand that they need to be filing a return for their entity but they don’t think about quarterly estimated taxes. Often, people wonder, “How do I calculate it all?” since they’ve been told conflicting information about whether it’s net income or gross income.
What’s another common question you get asked?
“What forms do I need?” I hear a lot of people say, “I didn’t know I had to file this!”
What are the consequences of not doing your taxes correctly?
Usually, it’s a percentage penalty on tax if they underestimate.
What about these people who haven’t done their taxes in 10 to 15 years. What happens then?
You’d have go back and pay taxes, and submit an Offer in Compromise with the IRS because you probably don’t have the money to pay it all at once. Under certain circumstances, you may be able to pay less of the tax liability, or even go on a payment plan.
But what happens if you’re filing bankruptcy?
Typically, if you want to have your taxes discharged, you would need to add three years to the tax due date. This will determine the earliest date you can file for bankruptcy as well as have your taxes discharged. For example, if you file your taxes on April 15th, 2015, you will not able to file for bankruptcy until April 15th, 2018.
Are there any common concerns for local and state taxes?
Be aware of local county or city taxes, like on business licenses. Los Angeles County and other counties charge tax on the value of the assets, similar to a property tax rate. You’ll have to fill out a form and report the value of your business.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.