Top 5 Common Taxpayer Mistakes From My View in My Tax Office
An Unscientific Study of Taxpayer Mistakes
As the tax filing season begins again, articles are or will be written in newspapers, magazines, and on-line warning tax filers to avoid some of the common mistakes that are made year in and year out.
I find it ironic that, in the age of e-filing, the IRS warns of mistakes that would commonly be made by paper filers. The warnings by the Wall Street Journal and on Daily Finance.com are better, but some of their recommendations won't apply to an average taxpayer.
Now it is my turn to list some of the common mistakes I see in our tax preparation office.
#1 Not Filing A Tax Return
This seems almost silly, but throughout the tax season and all year long, we have clients come in that haven't filed tax returns in years. Some of the reasons we hear include:
- I couldn't be bothered.
- I didn't think I needed to file.
- I owe back taxes or child support so they will just take my refund anyway.
Last year a couple came into one of our offices with a letter from the IRS stating that they had to file their 2009 and 2010 returns by April 11th. Of course, they also had to file their 2011 return.
The taxpayers had very few of their old records, but the IRS did. All of those W-2s, 1099s, etc that you receive, so does the IRS. In fact, the IRS could do your return for you and send you a tax bill (and sometimes they do). They have the best interests of the IRS in mind and not yours. They don't always know your filing status, the number of dependents you have, nor the deductions or credits you are entitled to; all of the things that could decrease your tax liability. It is not the job of the IRS to decrease your tax liability. It is your job. (If Warren Buffet reads this, I would welcome his comments).
After paying for and obtaining copies of their records from the IRS, combined with the records they did have, we were able to complete all of their returns. With the 3 returns, their total REFUND was over $10,000! Why didn't these taxpayers file their returns earlier?
The moral of this story is: sometimes the biggest mistake you can make when filing your taxes is to not filing. Not filing doesn't mean that you won't owe taxes, but it does mean you won't get a refund if you are due one. The IRS already has your information. File your taxes before they do it for you.
#2 Not Reporting All of Your Income
Not reporting all of your income can be a simple, honest, mistake or it can be illegal. If you knowingly and intentionally fail to report your income, you may receive civil and criminal penalties. Despite what many believe, according to the tax code, all income, including cash income and tips, is reportable. For restaurant employees, your employer may track tips and report them on your W-2 at the end of the year. For the self-employed, anyone that pays you $600 or more over the course of the year is required to provide you (and the IRS) with a 1099.
Can it be an honest mistake? Sure. Most forms must be sent to you by January 31st. But some forms that report taxable income, such as a 1099-B from a broker, aren't due to you until Feb. 15th. Others, such as partnership K-1s, aren't due until even later. Even if you receive a form, there is a chance that an amended one could be provided to you at a later date.
In my tax office, some clients come in to file as soon as they get one W-2. They want their refund, particularly if it includes child tax and Earned Income Tax Credits. By the time they come back to pick up their paperwork, they have one or more additional W-2s. These additional W-2s can change their eligibility for the EITC. What was once a refund may now have to be paid back.
The moral of this story: report all of your income. The IRS probably already knows about it anyway. Be patient. Get all of your forms and file correctly the first time. If do you get a new form after you have already filed your tax return, file an amended return, 1040-X.
#3 Taking a Deduction You Were Not Entitled To
This can range from claiming children or other dependents you are not entitled to, to overstating itemized deductions such as charitable contributions, or even fraudulently claiming credits you are not entitled to.
There are very specific rules in the tax code with regard to the requirements that need to be met to claim an individual as a dependent. In fact, if all of the requirements are met, you may be able to claim parents that live in a nursing home, adult children that live in your basement, a relative, a girlfriend or boyfriend, or even a girlfriend's child that is not yours. In addition to decreasing your taxable income, claiming dependents may change your filing status from single to head of household.
In the cases of divorce or separation, occasionally the parent who is not entitled to claim a child claims the child to increase their refund. When the parent who is rightly entitled to claim the child files a return, the return is rejected. The second parent then has to file a paper return and the IRS will investigate and sort it out. The first parent may have to pay back their refund and the second parent has a long delay before receiving the refund they are entitled to.
With the Earned Income Tax Credit, this refundable credit depends primarily on your income and the number of qualifying children you can claim. The more qualifying children you can claim, up to 3, the larger your EITC. Taxpayers want to optimize their income and maximize their qualifying children to maximize their EITC. You can read my hub on "Who can be a Qualifying Child for EITC"" or this hub on fraudulently claiming the EITC.
All taxpayers should claim all credits or deductions that they are entitled to. But, a few will try to claim some that they aren't eligible for. There was a report a few years ago of a 4 year old claiming the first time homebuyer credit. (Maybe he just couldn't stand living with his parents any longer.)
The moral of this story: take the exemptions, deductions, and credits that your are entitled to and no more. Make sure you don't miss any that you are due. Taking ones that you aren't entitled to is fraud and you will be hit with the penalties that go with it. With EITC, if you falsely or erroneously claim it, you can be denied it for up to 10 years (even years you would be rightfully entitled to it).
Did you ever take a deduction or credit on your tax return that you probably shouldn't have?
#4 Incorrect Social Security Number or Birth Date
This is usually the typo mistakes, but in a few cases they can be intentional. For the most part, these issues include many of the clerical mistakes the IRS warns about with paper returns.
All of the names, social security numbers, and dates of birth of the taxpayers and dependents has to match those with the IRS or social security database. Assuming you aren't making up a name, social security number and birthday, this is usually a typographical error or an honest mistake (dad forgets a child or wife's birth date).
But, with e-filing, the clerical mistakes are different. The computer does the calculations so you no longer have to worry about math errors. With e-filing, you don't have to send in your W-2s. And while you don't have to put your signature on an e-filed return, you and your spouse, if filling jointly, have to use an electronic signature, a pin number, to file the return.
- All of the information entered onto your return is correct.
- Names, streets, etc., are spelled correctly.
- The numbers entered from W-2s and other forms are accurate.
- All names are spelled correctly and the birth dates and social security numbers are correct.
- Your account and routing numbers are correct if you are direct depositing your refund.
- Create a PIN to electronically sign the return.
- Use the correct filing status. Don't check more than one if filing by paper.
The moral of the story is: garbage in, garbage out. If you don't pay attention to details, the return will be rejected and just delay your refund.
What was your most bone-head typo mistake you have ever made on your tax return?
#5 Not Paying the Taxes Due
I'm not sure how often this happens, but I know it does. In Pennsylvania, taxpayers have to file federal, state, and local tax returns. We provide all of our clients with copies of these returns for their records. If they owe federal or state taxes, we also provide them with vouchers and an addressed envelope to send in their payments. Local returns can not be e-filed, so all of our clients are provided a return, W-2s etc., and an addressed envelope to send to the local tax agency.
How I do I know some taxpayers don't pay the taxes that are due? Simple. When they bring in last year's return to file this year's, I find all of the envelopes, vouchers, and forms still nicely tucked into the packet I gave them last year.
Moral of this story, pay your taxes when they are due. File any paperwork that you have to. If you send in a check, include the voucher and put your social security number on the check. If you can't pay, set up an installment payment arrangement with the IRS.
Was your tax refund:
April 15th is Fast Approaching
I hope this hub helps prevent you from making mistakes when you file your tax return. If you are filing your own return, be careful to avoid them. A reputable tax preparer or accountant should not let you make them.
The bottom line, remember to file your tax return!
Any federal tax or tax planning information provided above or linked to this article is not meant to be specific to any particular individual or situation. Anyone who wishes to apply this information should first discuss it with an accountant or tax professional to determine its appropriateness or how it specifically applies to their unique situation.
© 2012 Mark Shulkosky