Every tax-filing season is different. One thing is constant, though.
Taxpayers, and sometimes even the tax preparers they hire, make mistakes on 1040 forms.
Hey, we're only human. But there are some common tax filing errors that we all need to be aware of and do our best to avoid.
Here are 12, collected from my personal experience, talks with tax professionals and the Internal Revenue Service.
They're in no particular order. Some might seem insignificant. Others obviously are huge. Either way, each and every one could, at best, slow down the processing of your tax return and subsequent refund. At worst, they could cost you tax dollars and even prompt an IRS audit.
Check them out and as you prepare your return due by May 17, take care not to make any of them.
1. Omitting or entering inaccurate Social Security numbers: This nine-digit number was not intended to be our universal identifier, but, for better and in this age of identity theft often for worse, that's what the Social Security number (SSN) has become.
If you don't enter your Social Security number and that of each individual who's included on your Form 1040, from spouse to all dependents, as they are shown on your and others' Social Security cards, the IRS won't process your return.
These numerals are crucial because so many tax-related transactions, from income statements to investment earnings to retirement plan contributions and distributions, are keyed to this number.
A Social Security number also is critical when claiming several tax credits, such as the child tax and additional child tax credits, as well as ones for educational expenses and dependent care costs.
A quick note here for filers who use an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number to file. It your ITIN is expired, go ahead and file using the expired number. The IRS will process that return and treat it as a return filed on time. However, the IRS won't allow tax breaks claimed on these returns. Once you renew your ITIN, the IRS will process your return normally.
2. Misspelling or using different names: Most of the information on your tax return is numerical, but words — specifically names — are important, too. Spell all names listed on a tax return exactly as listed on your Social Security card, as well as the ID cards of your spouse if you're filing jointly and those of any dependents.
What's the big deal if you've gone by a middle or nickname all your life and enter that on your Form 1040? Plenty.
First off, when the names of a taxpayer, his or her spouse or their children don't match the number that the Social Security Administration (SSA) has on record, the IRS processing machine likely will kick out or slow down the tax return.
Name issues often are a problem for the newly married. Many folks still change their surnames when they marry, whether the "I do's" are exchanged by a bride and groom or a pair of wives or husbands.
In these cases, if you didn't alert the SSA of your name change after your wedding, your new name on your 1040 or other tax statements could cause a problem when you file your first joint tax return. Get in touch with the SSA ASAP to reconcile this.
The same issue also arises when marital bliss doesn't last and ex-spouses change names after a divorce. Again, make sure Uncle Sam's appropriate agencies know that, too.
Finally, remember to also let the IRS know when you move, even if you didn't change your name a part of a major lifestyle modification. That update will help ensure that your filing goes smoothly.
3. Improperly claiming a dependent: Having a dependent's tax ID number (see #1) generally means that you know that person can be claimed on your return. Or maybe not.
Sometimes determining just who is your tax dependent, be it a child or qualifying relative, can be messy. There are lots of rules about relationships and support earned or provided and who lives for how long in your house. Such considerations also can be complicated by personal circumstances, such as divorce and shared custody of children.
The confusion often leads to an innocent mistake about who is eligible to be listed as your tax dependent. Other times, though, folks knowing claim a person as dependent to get the added exemption amount or to claim the refundable Earned Income Tax Credit (EITC).
Faking dependents is not a good idea. This is willful disregard of the tax laws and your responsibility to meet them. Such intentional tax violations could lead to tough penalties, sometimes of the criminal nature, on top of the unpaid tax and interest added to it that you thought you were escaping with your fake dependent ploy.
Think the IRS might be too busy to catch your suddenly larger family? Think again. The IRS knows that filers sometimes add people, either real or imaginary or even pets, on their returns. That's why tax examiners look at who has and hasn't been listed before on your returns.
4. Using the wrong filing status: Dependents also affect your filing status. So does divorce. Or marriage. All these life changes mean that every year, some taxpayers choose the wrong filing status.
This innocent error could be costly, as each filing option could make a difference in your ultimate tax bill. And it's a selection that can be different from year to year as your tax and personal situation change.
Take, for example, your first tax return filing since your divorce (and item #2 name change). You might think you now should file as single. But since you have primary custody of your dependent children (see #3), your more advantageous filing status is head of household. In fact, you could be a head of household taxpayer even if you've never married and don't have kids, but are providing the bulk of support for someone else.
Check out all five filing status options. If you're unsure about which you should select, use the IRS' Interactive Tax Assistant. This online tool can help your sort out your correct current filing status.
5. Overlooking credits or deductions: Here's a non-news flash. The tax code is complicated, despite (or, say code critics, because of) continual tweaks made by Congress and how the IRS interprets them in its subsequent regulations. That means there still are lots of mistakes to be made as you look for tax-saving credits and deductions. This search has its own errors obstacle course.
This process itself too often leads to taxpayers missing or even deciding not to claim a tax credit or deduction. But that, too, is a major mistake. Even the IRS tells us to claim all the tax breaks for which we legally qualify.
The EITC mentioned in mistake #3 is notable here. Every filing season, the IRS makes a special effort to remind taxpayers eligible for the EITC to claim it. This filing season, due to the COVID-19 pandemic, there's an added EITC mistake option, deciding which tax year earnings, either 2019 or 2020, to use in claiming this tax credit.
Even folks whose returns seem simple could run into trouble. Take, for example, older filers — that's age 65 or older in the IRS' eyes — or filers who have vision issues. These folks typically qualify for a higher standard deduction. It's automatic as long as you check the correct box(es) on your return. To ensure that this isn't overlooked is one of the reasons the IRS created the new 1040-SR for these files.
Again, you might want to use the Interactive Tax Assistant to help determine if you're eligible for certain tax credits or deductions.
6. Not claiming all your COVID relief money: Last year, two federal payments were issued to help people cope with the pandemic's financial cost. These economic impact payments, or EIPs, actually were advance distribution of the Recovery Rebate Credit.
The IRS calculated the credit amounts based on information from individuals' prior tax filings. But since the filers' situations may have changed in 2020, some of the amounts sent out weren't correct. If your 2020 tax return data shows that you should get additional EIP money, you need to do that by claiming the Recovery Rebate Credit.
This could be the case for taxpayers whose income in 2020 was less than the 2019 amount the IRS used to initially figure the EIPs. You also could be due a larger COVID-19 relief amount because in 2020 you had a child who makes you eligible for the added EIP dependent amount. Don't make the mistake of not checking out the Recovery Rebate Credit. Not only could it help reduce any tax you might owe, but if you qualify for more credit than tax due, it will be sent to you as a refund.
7. Not reporting all your income: The coronavirus EIPs don't count as taxable income, but many taxpayers did get some added, and taxable, earnings in 2020. For some, the extra money came from a side hustle or two. Others, laid off due to COVID economic complications, ended up going into business for themselves as independent contractors. In these gig situations, you may (or may not) have received a Form 1099-NEC detailing the earnings. This is the 1099 form, which had been used decades ago and was resurrected in the 2020 tax year to replace the 1099-MISC when it comes to reporting nonemployee compensation.
Still others had savings and investment accounts that earned their owners a few extra dollars. If so, you might have received Form 1099-INT and/or Form 1099 DIV statements.
In all these 1099 situations, the IRS also got a copy of your 1099 earnings. So if you forget to include any of these amounts on your return, IRS examiners will let you know you that it knows and that you owe taxes on that money, too. And depending on when your oversight is discovered, you also could owe penalties and interest on the unreported earnings.
Note that if you make money on investments, but have it reinvested instead of paid directly to you, those earnings are taxable. Even though these reinvested amounts on your investments go back into those stock or mutual fund holdings instead of your bank account, they are taxable income.
And don't forget about unemployment you collected when your hours were reduced or you lost your job entirely due to the coronavirus. Yes, $10,200 of unemployment benefits are tax-free. But if you got more than that, that excess is still taxable.
8. Ignoring the virtual currency question: The IRS has been committed for years to making sure that folks who use virtual currency pay the appropriate tax on related transactions. The latest effort to do this is the placement of a question on Form 1040 asking whether at any time during 2020, you received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency. Note, too, that if your only related transactions during 2020 were purchases of virtual currency, you're not required to answer "yes" to the tax return question.
9. Making math miscalculations: As we've already seen in many of the filing errors listed far, the IRS is all about the numbers. So it's no surprise that the most common mistakes made on tax returns, year after year, is bad math.
Arithmetic errors range from simple addition and subtraction to more complex tax items, like the credits and deductions mentioned in mistake #5. Figuring things like the EITC or the taxable portion of a retirement account distribution, for example, is more difficult and, not surprisingly, produces more math errors.
In processing 2018 tax year returns during the 2019 fiscal year, the IRS discovered almost 1.88 million math errors. Those incorrect figures then prompted the tax agency, as shown in the graphic below from the IRS' 2019 Data Book, to follow up with the math-mistake-making taxpayers.
Many of the mathematical mistakes each year are from basic tax calculation and other tax computation errors. This includes mistakes associated with the calculation and assessment of income taxes, as well as other taxes, such as self-employment, household employment and alternative minimum taxes.
Considering that most of us use tax software, in large part because it does the math for us, that's bit alarming. But it also underscores why that adage garbage in/garbage out is so apt when it comes to tax returns.
The wrong number on one tax form's line produces a wrong calculation that gets transferred to another form, automatically with software. That math error then is exponentially compounded. So pay close attention when you enter your numerical data into your tax return.
10. Entering incorrect bank account numbers: The IRS has for years encouraged us to file electronically and have our refunds directly deposited into a financial account.
That process is easy for taxpayers and the IRS, unless you enter the wrong account number and accompanying routing number. These numbers usually are found on your paper check, like the example image below.
But in some cases, especially as financial institutions expand their digital options, routing numbers could be different. Our bank uses a routing sequence that's different from that on the handful of paper checks we have. So double check with your financial institution as to what numbers to put on your tax return.
Previously, a bad account or routing number meant potential total loss of your tax refund. Unlike paper check refunds that were replaced with another printed U.S. Treasury check, the errant direct tax deposit was, in many cases, finders' keepers for the owner of the account where the direct tax deposit ended up.
The good news is that, as mandated by the Taxpayer First Act, the Treasury Department at the end of 2020 established a new mechanism to deal with errant IRS direct deposits. Still, your best defense is to double check your account numbers so that your refund goes to the accounts you choose.
You noticed the plural accounts in the prior sentence, right? You have the option to subdivide your directly deposited tax refund into as many as three accounts. That's a good financial move for many, sending some of the refund to savings, a bit to an IRA and the rest to checking for immediate access. To accomplish this split, just file Form 8888 along with your individual return.
But remember, the more numbers you enter on a tax form, the more chances you have to enter them incorrectly. So again, double check all these account and routing numbers to ensure that your refund doesn't end up in someone else's account or is sent back to the IRS.
11. Not signing your tax return: A tax return that's unsigned gets the same treatment as ones missing Social Security numbers. A return lacking a signature — or signatures; when married couples file a joint return, both spouses must sign the 1040 — isn't valid and the IRS won't process it. There are some possible exceptions for members of the armed forces or other taxpayers who have a valid power of attorney.
The easiest way to avoid this oversight is to file electronically and digitally sign it before sending it to the IRS. Your tax software, either the package you bought or the one you're using on Free File, will walk you through the e-signature process.
If, however, you're still mailing your return, don't be in such a hurry to be done with the job that you stuff your 1040 in the envelope sans signature.
12. Missing the filing deadline: With tax deadlines moved the last two filing seasons to help give taxpayers more time to deal with their taxes in the time of COVID-19, it's easy to lose track of the actual, send in your Form 1040 due date. This year, that's May 17.
But don't let the extra month make you complacent. The filing deadline will show up before you know it and possibly before you're ready.
So consider working on your taxes now and filing before May 17. If you push off this task until the last possible moment, that likely will increase the possibility that you'll make one of the other 11 mistakes in this post. But missing the Tax Day deadline itself could be your biggest one.
Not filing and paying any tax you owe by the annual filing deadline will mean that you'll face added penalty and interest charges. And those just keep adding up until you do file and pay.
If you can't make it by May 17, you can get more time to file by sending the IRS Form 4868. But that extended Oct. 15 is just to get all your forms done. You still must send by the new May deadline any tax you owe with your extension request. If you don't, the clock starts on those accruing late-filing or non-filing penalties.
Sorry if this list of mistakes means you have to spend a bit more time messing with your taxes.
But a preview of what to avoid and then a review of your 1040 before you hit send to e-file it or drop it in the snail mail box can literally pay off in the final IRS handling of your return and your tax refund.
|Coronavirus Caveat & More Information
In 2021, we all still are dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.