8 Common but Preventable Tax Filing Mistakes Made by Individuals
The IRS doesn’t like mistakes. Neither should you. Mistakes translate to a longer processing time for your tax filing. Mistakes could mean a delay in a refund. Even worse, mistakes could result in an audit, which takes time and money to respond to and manage. Depending on the nature of your mistake, you could face some hefty monetary penalties.
Some tax filing mistakes are simple. Some are complex. Most are unintentional. Some are not. But the vast majority of these mistakes are preventable, especially if you’re working with a CPA and following a sensible tax planning strategy.
Here are four simple mistakes of the administrative variety, followed by four more serious mistakes typically caused by lack of knowledge about tax requirements.
Typos are usually harmless. We all make mistakes. But typos on your tax returns can create unnecessary headaches.
According to the IRS, incorrect (or missing) Social Security numbers, misspelled names, and names that don’t match the spelling on Social Security Cards are some of the most common errors individuals make on their tax returns.
2) Math Errors
It’s one thing to make a mistake because you hit the wrong button on your calculator. That’s a simple error you can correct by simply running the numbers again.
It’s another thing to make a mistake because you don’t know the right way to calculate tax credits, deductions, taxable income, etc. Your math may be just fine, but the formula you used was incorrect. This is a clear indication that it’s time to hire a professional.
3) Missing Signatures
An unsigned tax return is about as valid as an unsigned check. In other words, it’s not valid at all.
4) Bank Account Blunders
If you use direct deposit, you can get your refund faster. You also have the option to deposit your refund into multiple accounts. However, if you enter the wrong routing and account numbers, your money might not end up where you want it. Even worse, your money could end up in someone else’s account or returned to the IRS.
5) Missed Estimated Tax Payments
If you’re among the 15 million or so self-employed people in America, this is a big deal. Forgetting to make quarterly estimated tax payments will result in huge bill from the IRS at some point. If you can’t cover it, you have to set up a payment plan with the IRS. Otherwise, you could be subject to forced collections through levies and wage garnishments.
6) Failure to Report All Income
If you make extra money as a consultant or a bartender, you have to report it – all of it – even if you’re paid in cash. If you make money from capital gains, dividends, royalties, rent, interest or even gambling, you have to report it correctly and submit the proper forms.
Take income from side jobs, for example. If you’re audited, you’ll have to show the IRS copies of bank statements and cash transactions. Then the IRS might audit the last three years of your tax returns. If you didn’t report more than 25 percent of your gross income, they could audit the last six years of your tax returns.
Intentional or not, failing to report all income can be a costly mistake.
7) Failure to Track Alimony
Whether you’re paying or receiving alimony, you need to keep accurate records. If the numbers you report don’t match the numbers your former spouse reports, expect a letter from the IRS. Then you’ll have to go through the process of either amending your return or showing documented proof that your number is correct, which could take months.
8) No IRA Withdrawal After Age 70
If you’re older than 70 ½ years old or you’ve inherited an IRA, you have to make a withdrawal before the end of the year. Some people don’t know this or just forget. If you don’t withdraw the required minimum distribution, you’ll have to pay taxes on the money you were supposed to withdraw, plus a 50 percent tax penalty.
Is It Time to Get Help?
There’s a reason why filing on paper increases the risk of errors by 20 times compared to filing online. Technology automatically calculates certain figures and can alert you to simple errors so you can fix them before filing. Of course, it can’t eliminate all data entry mistakes.
Tax software and e-filing options can help you reduce errors. But when it comes to calculating deductions, knowing which deductions and credits you can claim, and navigating the complexity of retirement account distributions, you need an experienced tax professional who can help you throughout the year, not just the filing deadline. Contact us if you need help with tax planning and preparation.