10 common tax filing mistakes to avoid
Wednesday, March 22, 2023
When you make a mistake on your Form 1040, the best thing that could happen is the Internal Revenue Service will catch your relatively insignificant error, fix it, and send you a notice about the change.
A worse outcome is the IRS changes reduce and/or delay the refund you're expecting.
And the absolute worst tax error outcome is that your mistake isn't a minor one, and the IRS decides to take a longer, closer look at your filing.
The only way to avoid these situations is to double check your return to ensure it's error free before your file.
Here are 10 common tax mistakes, collected from my personal experience, talks with tax professionals, and the IRS, that happen every filing season. Make sure you don't make any of them.
1. Not reporting all your income: Economic, and recently health, issues have prompted more Americans to expand their earnings options. These side hustles or full-time entrepreneurship or investments, to name just a few, also come with tax responsibilities.
In many cases, the money you make will be reported to you and the IRS on one of the myriad 1099 forms.
If your circumstances took the opposite route, the unemployment payments you got are taxable. And yes, the IRS will be notified of this amount, too.
Let me repeat that. These third-party income reporting forms go to you AND the IRS. The tax agency will know if your earnings total doesn't match its math. It will let you know of the discrepancy.
So double check those stacks or desk drawers for the Form 1099-NEC that details your contract earnings. Ditto for the 1099-DIV and INT forms issued in connection with investments, and the 1099-G for unemployment benefits. My earlier post on tax documents you need to file your 2022 return will give you an overview of possible other such reporting forms.
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, like those various earnings in avoidable tax error #1, are keyed to this number.
A Social Security number also is critical when claiming several tax credits, such as the Child Tax Credit and Additional Child Tax Credit, 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. That update will help ensure that you'll get any IRS notice with questions, since this correspondence is sent by U.S. Postal Service mail, in a timely manner and you can clear it up quickly.
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 a 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 mistake #3 name change). You might think you should file as single. However, 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 you sort out your correct current filing status.
6. Overlooking or miscalculating tax breaks: 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.
The EITC mentioned in mistake #4 is notable here. Every filing season, the IRS makes a special effort to remind lower- and moderate-income taxpayers eligible for the EITC to claim it. And every year, around 25 percent of those EITC-eligible filers still don't claim it.
This is a mistake that could cost you, depending on your income and family size, thousands of dollars. In the EITC case, check out the IRS' online interactive EITC Assistant.
7. 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 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
Don't think you can skip this if you didn't. The Form 1040 digital asset query requires an answer, yes or now, from all filers. If you're unsure whether you dabbling in digital currency counts, check out my post on this year's changes to the digital asset question, as well as read the Form 1040 instructions, or ask your tax professional.
8. 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, make sure they are the ones your bank wants you to use. 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.
9. 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.
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 2020 tax year returns during fiscal year 2021, the IRS' 2021 Data Book reports that the agency more than 12.3 million notices to filers in connection with 12.9 million math errors found on their returns. That's a huge increase from tax year 2019 and prior, where the IRS issued 730,119 notices in connection with 1 million math errors.
Considering that most of us use tax software, in large part because it does the math for us, that's a 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 a lone error can compound, and not in the good financial way, exponentially. So pay very close attention when you enter your numerical data into your tax return.
10. Missing the filing deadline: Millions of taxpayers put off filing until the very last minute. That's OK as long as your mailed paper return is postmarked by the April filing deadline or you hit "enter" to e-file your 1040 by midnight of the due date.
The good news this year is that you have a few more days, until April 18, to file. Don't miss it. If you owe, then penalties and interest will start accruing on that unfiled return and unpaid amount.
If you just can't complete your Form 1040 (and all the associated docs) by Tax Day, be sure to file Form 4868 to get an extension. That will give you six more months to finish and send your return to the IRS.
Be sure to send any tax you owe with your Form 4868. The extension request is only for filing, not paying. If you don't pay what you owe by April 18, those penalties and interest come into play.
Nobody wants to pay Uncle Sam a penny more than necessary, so don't make the mistake of missing the filing deadline.
And don't make any of the other nine avoidable tax filing errors either.
Musical take on mistakes: Check out my tumblr tax blog Tumbling Taxes for a look at when to err is a great song, specifically "Mistakes" by Lake Street Dive.
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