Hierarchy of Taxpayer Sins to the IRS

The IRS wants taxpayers to do the right thing on their tax returns and has an arsenal of penalties to enforce correct behavior. I thought it would be useful to list what I thought the IRS cares most about by a hierarchy of sins based on the level of penalties imposed starting with number 5 and going to the biggest sin.

5. Making a mistake. In this case usually no penalty is imposed at all.
4. Paying your taxes late is a .5% penalty per month on the unpaid balance.
3. Overstating expenses will get you a 20% underpayment penalty (accuracy related penalty).
2. If you don't report income reported to you on a 1099 or W-2, you are subject to a 30% penalty on the understatement amount. The IRS calls this a reportable transaction.
1. The biggest sin of all is not filing a tax return. The late filing penalty is 5% of the unpaid balance for each month the return is late up to 25%. The willful failure to pay tax or file a return is subject to a maximum fine of $25,000.

Obamacare Penalty

There is a box on the tax return asking if you had qualified health insurance coverage during 2016. If you indicate that you didn't have coverage every month you will be subject to significant penalties up to as much as 2.5% of your adjusted gross income less an amount based on your filing status. President Trump signed an executive order on his first day directing federal agencies to exercise all authority and discretion to reduce the burdens of the Affordable Care Act (ACA). Now because of the executive order the IRS is allowing tax returns to be processed without a response to the health care coverage question. If you don't want to answer the question you now have that option. You may receive follow up questions from the IRS as taxpayers are still required to follow the ACA law.

Donating Time Shares

This does not work as a charitable donation if you just donate a week of your time share to a charity auction. To make it work you have to give up your entire ownership interest in the time share. The rental value of the right to use property is not a gift of a complete interest in the property which is the problem.

Personal Energy Property Tax Credit

If you make certain improvements like energy saving insulation, windows, doors and roof to your principal residence then you can take a tax credit for up to $500 on your tax return. The credit is based on 10% of such eligible costs. The $500 is a lifetime cap on the credit which has been available since the 2006 tax year. This credit expires after 2016.