Don't make any of these 10 common tax-filing mistakes
Thursday, April 04, 2024
The tax filing, and paying if you owe, deadline is nearly here. Millions of us have yet to send our 1040 forms to the Internal Revenue Service.
So next week is likely to be frantic, especially on the part of taxpayers who are doing their own taxes. This also means that these last-minute filers might make some mistakes as they hurry to get their taxes done by April 15.
Don't be one of them.
Tax return errors mean, at best, the IRS' processing of your forms — and the issuance of any associated refund (and yes, some procrastinating filers are due refunds) — will be delayed while you and the IRS work to clear up the wrong information.
A worse outcome is that your errors mean you owe Uncle Sam.
You could end up with a tax bill that filing mistakes didn't show. Or you calculated a tax liability, but wrongly, so you end up owing more than you thought. When that happens at the tax deadline, penalties and interest are added to your un- or underpaid amount.
You can avoid these unwanted outcomes by double checking your return before you mail it or, more likely, hit send when you finish your software preparation.
Here are xx common tax mistakes, collected from my personal experience, talks with tax professionals, and the IRS, that happen every filing season. Don't make any of them this year.
1. Not reporting all your income: When you're only income is from a job, all you have to worry about is entering your W-2 data. But even those of us who are employees often supplement that with side hustles. In some cases, you'll get a 1099 form with details of these gig earnings. But even if you don't get a 1099-NEC statement, which generally isn't required until you earn more than $600, you still need to report those amounts.
And don't forget any other payments not subject to withholding, such as investment earnings (on 1099-DIV and INT forms), certain gambling and prize winnings, an even unemployment benefits. Yes, you'll get a 1099-G for those out-of-work amounts.
Where a 1099 or comparable statement is issued to you, the IRS will get a copy, too. So the tax agency will know if your earnings total doesn't match its math. And it will let you know of the discrepancy.
So double check the tax statements you got earlier this year. My earlier post on tax documents you need to file your 2023 return can help refresh your memory. And enter all that info, correctly, on your Form 1040.
2. Making math miscalculations: As This is a reiteration of mistake #1's last admonishment. Enter the correct amounts on your 1040.
Math errors are the most common mistakes made, year after year, on tax returns. They range from transposed numerals to simple addition and subtraction errors to more complex tax item calculations, like figuring credits and deductions. And no, tax software can't help you here. In fact, it can make things worse.
When you enter a wrong amount on one tax form line, it produces a wrong calculation that gets automatically transferred to another form, meaning that a lone innocent 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.
3. 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.
4. 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 Social Security cards; that's yours, your spouse's tax ID number 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 or a 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. 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.
5. Improperly claiming a dependent: Having a dependent's tax ID number, as noted in #4, 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.
6. 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. You might think you should file as a single taxpayer. But since you have primary custody of your dependent children, 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.
7. 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 search for tax breaks.
Many of the errors are child-related tax breaks, such as the child and dependent care credit, Child Tax Credit, and the EITC mentioned in mistake #5. And this year, some taxpayers are still due COVID-19 pandemic tax benefits they didn't claim in a prior tax year. They still can claim the 2020 tax year money as a Recovery Rebate Credit, but only if they do so by May 17.
Overlooking the EITC is particularly notable, since the tax credit can net eligible families a sizeable amount, as much as $7,430 on 2023 returns. Although the IRS makes a special effort every January to remind lower- and moderate-income taxpayers eligible for the EITC to claim it, around 25 percent of those EITC-eligible filers still ignore it every year. Big mistake, as this dollar-for-dollar reduction of any tax you owe could ultimately produce a tax refund if your EITC amount is more than you owe. If you're unsure as to whether you qualify, check out the IRS' online interactive EITC Assistant.
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. As has been the case for several years, filers of Forms 1040, the main individual income tax return; 1040-SR, the form filed by age 65 or older taxpayers; or 1040-NR, the form for U.S. nonresident alien taxpayers will see a crypto question. But for this tax season, the This year, the crypto question has also been added to four other forms. It now must be answered by filers of —
- Form 1041, U.S. Income Tax Return for Estates and Trusts;
- Form 1065, U.S. Return of Partnership Income;
- Form 1120, U.S. Corporation Income Tax Return; and
- Form 1120-S, U.S. Income Tax Return for an S Corporation.
The crypto query also is tweaked on the forms for corporate, partnership, or estate and trust taxpayers, to reflect those filers using it, but they all ask the same basic question:
At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?
Don't ignore the form question. The IRS emphasizes that it requires an answer from all taxpayers, not just by those who engaged in a digital currency transaction. Failure to answer, regardless of your response, means your return is incomplete. And that could slow the processing of your return.
If you're unsure whether you dabbling in digital currency counts, check out IRS.gov's special pages on Digital Assets and Frequently Asked Questions on Virtual Currency Transactions.
9. 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.
10. Missing the filing deadline: If you're reading this, you're probably one of the millions of taxpayers who 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.
Don't miss the filing deadline. If you owe, then penalties and interest will start accruing on that unfiled return and unpaid amount.
If you just can't complete your return Tax Day, file Form 4868. It will get you an automatic six-month extension, during which you can finish and send your return to the IRS. Note, however, that this is only an extension to file your return. You must pay any tax you owe when you submit your Form 4868.
Since nobody wants to pay Uncle Sam a penny more than necessary, don't make this mistake #10 of missing the filing deadline.
And don't make any of the other nine avoidable tax filing errors either.
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