Don't make any of these 12 common tax filing mistakes
Wednesday, March 02, 2022
The only thing worse than paying taxes is having to fill out the required paperwork every year.
Just looking at a Form 1040, whether through the step-by-step Q&A lens of tax software or with the guiding hand of a tax pro, can send chills down the spines of most taxpayers, even those whose tax circumstances are relatively simple.
There's that nagging fear that this is a test from Uncle Sam and you're going to fail.
I get it. I've been filing my own taxes for a long, long time. I've been writing about taxes for a long time. For a while, I worked on the House Ways and Means Committee that's tasked with creating the tax laws. And I still am a tad trepidatious every year when I start working on my tax return.
Turning tax fear into correct filings: Fear is a funny thing, though. While it can paralyze you, a little bit can be a good thing. It makes you more aware of your potentially perilous situation. That then can help you fend off threats.
The biggest threats when it comes to tax returns is making mistakes.
Minor ones could delay processing of your return, which then will mean you have to wait longer for your tax refund. Bigger mistakes could mean you have to redo your return to correct them.
The biggest filing mistakes can be very costly, thanks to corrections that add to your tax bill, as well as the penalties and interest tacked on for all the time it took to fix the errors.
So it's worth your peace of mind as well as your bank account balance to file carefully. Knowing some of the perennial tax mistakes that filers tend to make can help you do that.
Here are 12 common tax mistakes, collected from my personal experience, talks with tax professionals, and the IRS.
1. Filing too soon. Yes, tax season 2022 has been underway since Jan. 24. And yes, the IRS already has processed more than 33 million returns.
But at last count, the tax agency also was still working on nearly 2.5 million returns. It's a good bet that some of those forms are taking more time because the taxpayers were in a hurry and filed before they should have. You need to make sure you have all the information you need, especially in cases where the IRS is copied, to accurately complete your return.
So take all the time you need to file properly, even if it means getting an extension to file beyond this year's April 18 Tax Day. This post on at tax statements and an accompanying filing checklist can help.
2. 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.
3. 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.
4. Improperly claiming a dependent: Having a dependent's tax ID number (see #2) 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.
5. 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 #3 name change). You might think you now should file as single. But since you have primary custody of your dependent children (see #4), 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.
6. Overlooking or miscalculating 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 #4 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 are added EITC enhancements and considerations.
Again, you might want to use the Interactive Tax Assistant to help determine if you're eligible for certain tax credits or deductions.
7. Not claiming all your COVID relief money: Speaking of COVID-19, and yes, we still are for the third consecutive tax season, be sure to get all the pandemic relief for which you qualify. For many taxpayers, that's the remainder of the Child Tax Credit. It was bumped up substantially for the 2021 tax year, and around 36 million families got half of these bigger credit amounts as Advance Child Tax Credit payments last year. Now they need to claim the rest of it.
The same application process applies to folks who didn't get all or any of the third economic impact payment (EIP) distributed last year. Like the Advance Child Tax Credit, these EIPs were advance distribution of the Recovery Rebate Credit. Since the IRS relied on prior tax filing data to send them out, you might qualify for more than you got based now on your 2021 tax data.
This could be the case if your 2021 income was less than the 2020 amount the IRS used to initially figure your EIP. You also could be due a larger COVID-19 relief amount because last year you had a child, making you eligible for the added EIP dependent amount.
So be sure to doublecheck these refundable tax credits. Not only could they help reduce any tax you might owe, but if you qualify for more credit than tax due, the excess credit will be sent, as their designation notes, to you as a refund.
8. 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 2021. The extra money for some came from a side hustle or two. Others, either laid off due to COVID economic complications or who decided to join the Great Resignation, 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. 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. The law that allowed for up to $10,200 of unemployment benefits to be excluded from taxable income expired. For the 2021 tax year, all your unemployment payments are taxable.
9. 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 IRS is making a concerted effort to track Bitcoin and its digital cousins by asking on your 1040 if at any time during 2021, you received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency. Note, too, that if your only related transactions last year were purchases of cryptocurrency, you're not required to answer "yes" to the tax return question.
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.
In addition to carefully entering the digits on your return, also make sure they are the ones your bank wants you to us. As financial institutions expand their digital options, routing numbers could be different. Our bank uses a routing sequence that's different from the numerals on the handful of paper checks we have. Double check with your financial institution for the correct digits to use.
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.
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.
And about that power of attorney, if you're giving your tax professional the ability to act and speak for you when it comes to taxes, be sure you also fill out and properly sign the required form. Neglecting that detail cost one couple a nearly $13,000 tax refund.
The easiest way to avoid autograph oversights is to file electronically and digitally sign your return 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. Making math miscalculations: As we've already seen in many of the filing errors listed far, the IRS is all about the numbers. That's why it's not surprising that the most common mistakes made on tax returns, year after year, involve bad math.
So, I guess this error does sort of make tax filing like those dreaded math tests of yore.
Arithmetic errors range from simple addition and subtraction to more complex tax items, like the credits and deductions mentioned in mistake #6. But many of the mathematical mistakes each year are from more basic bad tax math.
In processing 2019 tax year returns during fiscal year 2020, the IRS' 2020 Data Book reports that the agency more than 1 million notices to filers in connection with 1.2 million math errors on their returns. During 2019, adds the report, math errors associated with calculation of income or other taxes made up 35.3 percent of total math errors. This error also was the most common one in tax year 2018.
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 the adage garbage in/garbage out is so apt when it comes to tax returns.
With tax software, a wrong number on one tax form line produces a wrong calculation that gets automatically transferred to another form, meaning that lone error can compound, and often not in the good financial way, exponentially. So pay very close attention when you enter your numerical data into your tax return.
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.
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