IRS Penalties - Edgar Palacios

Avoid Underpayment Penalties
Avoid underpayment penalties at all costs! Pay the minimum required estimated tax payments on time and in the correct amounts.
Why add insult to injury? One of the easiest ways to avoid unnecessary underpayment penalties is to pay enough estimated tax during the year.
For most taxpayers in 2001: If you owe more than $1,000, your required payment to avoid a penalty is the lesser of (1) 90% of your 2001 tax, or (2) 100% of your 2000 tax.

For those with 2000 adjusted gross income of more than $150,000 ($75,000 if married filing separately in 2001): If you owe more than $1,000, your required payment to avoid a penalty must be the lesser of (1) 90% of your 2001 tax, or (2) 110% of your 2000 tax.


Be Aware Of Hobby Loss Rules
If the IRS considers your business a hobby, you may not be able to deduct your losses!
Losses related to activities that you don’t engage in for a profit (hobbies) are usually only deductible to the extent of income you produce from that activity. This is known as the hobby loss rule. The IRS generally takes the position that a business is not a hobby if it shows a profit in three out of five years. This doesn’t mean that your business isn’t a bona-fide business, but the IRS can ask you to produce evidence that your efforts are geared toward making a profit.


Obtaining An Adoption Taxpayer ID
Get IRS Form W-7A, which you can use to obtain an Adoption Taxpayer Identification Number (ATIN). ATINs are used for adopted children until the adoption is final. ATINs are issued by the IRS and expire in two years. After the adoption is final, you must apply for a Social Security Number (SSN) for the adopted child.

Why do you need an ATIN? So that you’re eligible to:

Claim the child as your dependent if the child meets the dependency tests.
Claim the child and dependent care credit.
Claim the adoption credit.
Claim the child tax credit.

Because you need the child’s Social Security Number to claim the earned income tax credit (EIC), you can’t claim the earned income credit until the adoption is final. However, when the adoption is final and the child has a Social Security Number, you can file an amended return for an earlier year in which you could have claimed the EIC, except for the fact that the child did not have an SSN.

Wrong Social Security Number
Don’t delay your refund! Make sure you put the right Social Security number on your tax return! Believe it or not, this is one of the most common mistakes the IRS sees in returns filed every year. Most of us don’t use our Social Security numbers very often during the year, so it’s easy to transpose a couple of the numbers. Get out that Social Security card and double-check. Also, if any of your tax documents (W-2s, 1099s, etc.) have your Social Security number listed incorrectly, talk to your employer, the bank, or whoever issued the document and get it corrected!