Top 5 Common Taxpayer Mistakes From My View in My Tax Office
An Unscientific Study of Taxpayer Mistakes
As the tax filing season begins again, articles are or will be written in newspapers, magazines, and on-line warning tax filers to avoid some of the common mistakes that are made year in and year out.
I find it ironic that, in the age of e-filing, the IRS warns of mistakes that would commonly be made by paper filers. The warnings by the Wall Street Journal and on Daily Finance.com are better, but some of their recommendations won't apply to an average taxpayer.
Now it is my turn to list some of the common mistakes I see in our tax preparation office.
1. Not Filing a Tax Return
This seems almost silly, but throughout the tax season and all year long, we have clients come in that haven't filed tax returns in years. Some of the reasons we hear include:
- I couldn't be bothered.
- I didn't think I needed to file.
- I owe back taxes or child support so they will just take my refund anyway.
Several years ago a couple came into one of our offices with a letter from the IRS stating that they had to file their 2009 and 2010 returns by April 11th. Of course, they also had to file their 2011 return.
The taxpayers had very few of their old records, but the IRS did. All of those W-2s, 1099s, etc that you receive, so does the IRS. In fact, the IRS could do your return for you and send you a tax bill (and sometimes they do). They have the best interests of the IRS in mind and not yours. They don't always know your filing status, the number of dependents you have, nor the deductions or credits you are entitled to; all of the things that could decrease your tax liability. It is not the job of the IRS to decrease your tax liability. It is your job. (If Warren Buffet reads this, I would welcome his comments).
After paying for and obtaining copies of their records from the IRS, combined with the records they did have, we were able to complete all of their returns. With the 3 returns, their total REFUND was over $10,000! Why didn't these taxpayers file their returns earlier?
The moral of this story is: sometimes the biggest mistake you can make when filing your taxes is to not file. Not filing doesn't mean that you won't owe taxes, but it does mean you won't get a refund if you are due one. The IRS already has your information. File your taxes before they do it for you.
2. Not Reporting All of Your Income
Not reporting all of your income can be a simple, honest, mistake or it can be illegal. If you knowingly and intentionally fail to report your income, you may receive civil and criminal penalties. Despite what many believe, according to the tax code, all income, including cash income and tips, is reportable. For restaurant employees, your employer may track tips and report them on your W-2 at the end of the year. For the self-employed, anyone that pays you $600 or more over the course of the year is required to provide you (and the IRS) with a 1099.
Can it be an honest mistake? Sure. Most forms must be sent to you by January 31st. But some forms that report taxable income, such as a 1099-B from a broker, aren't due to you until Feb. 15th. Others, such as partnership K-1s, aren't due until even later. Even if you receive a form, there is a chance that an amended one could be provided to you at a later date.
In my tax office, some clients come in to file as soon as they get one W-2. They want their refund, particularly if it includes child tax and Earned Income Tax Credits. By the time they come back to pick up their paperwork, they have one or more additional W-2s. These additional W-2s can change their eligibility for the EITC. What was once a refund may now have to be paid back.
The moral of this story: report all of your income. The IRS probably already knows about it anyway. Be patient. Get all of your forms and file correctly the first time. If you get a new W-2 form after you have already filed your tax return, file an amended return, 1040-X.
3. Taking a Deduction You Were Not Entitled to
This mistake can range from claiming children or other dependents you are not entitled to in an attempt to qualify for tax credits, to overstating itemized deductions such as charitable contributions.
With the new tax law, far more taxpayers will be using the standard deduction. While the deduction for State and Local Taxes (SALT) will be limited to $10,000 for single and joint filers, there may still be the temptation to inflate charitable deductions or claim mortgage interest that you may not be entitled to claim under the new law.
Several other deductions such as fees for tax preparation, unreimbursed employee expenses, and investment advisor fees do not exist under the new tax law.
For 2018 there was an increase in the Child Tax Credit and a continuation of the Earned Income Tax Credit (EITC), both at least partially refundable credits. With complex qualifying rules, there can be a temptation to try to claim these credits, intentionally or unintentionally, even by those not entitled to them. For example, the EITC depends primarily on your income and the number of qualifying children you can claim. The more qualifying children you can claim, up to 3, the larger your EITC. Taxpayers want to optimize their income and maximize their qualifying children to maximize their EITC. You can read my articles on "Who can be a Qualifying Child for EITC"" or this hub on fraudulently claiming the EITC.
All taxpayers should claim all credits or deductions that they are entitled to. But, a few will try to claim some that they aren't eligible for. There was a report a few years ago of a 4-year old claiming the first-time homebuyer credit. (Maybe he just couldn't stand living with his parents any longer.)
The moral of this story: take the exemptions, deductions, and credits that your are entitled to and no more. Make sure you don't miss any that you are due. Taking ones that you aren't entitled to is fraud and you will be hit with the penalties that go with it. With EITC, if you falsely or erroneously claim it, you can be denied it for up to 10 years (even years you would be rightfully entitled to it).
Did you ever take a deduction or credit on your tax return that you probably shouldn't have?
4. Incorrect Social Security Number or Birth Date
These are usually typo mistakes, but in a few cases they can be intentional. For the most part, these issues include many of the clerical mistakes the IRS warns about with paper returns.
All of the names, social security numbers, and dates of birth of the taxpayers and dependents has to match those with the IRS or social security database. Assuming you aren't making up a name, social security number and birthday, this is usually a typographical error or an honest mistake (dad forgets a child or wife's birth date).
But, with e-filing, the clerical mistakes are different than what they used to be with paper returns. The computer does the calculations so you no longer have to worry about math errors. With e-filing, you don't have to send in your W-2s. And while you don't have to put your signature on an e-filed return, you and your spouse, if filing jointly, have to use an electronic signature, a pin number, to file the return.
- All of the information entered onto your return is correct.
- Names, streets, etc., are spelled correctly.
- The numbers entered from W-2s and other forms are accurate.
- All names are spelled correctly and the birth dates and social security numbers are correct.
- Your account and routing numbers are correct if you are direct depositing your refund.
- Create a PIN to electronically sign the return.
- Use the correct filing status. Don't check more than one if filing by paper.
The moral of the story is: garbage in, garbage out. If you don't pay attention to details, the return will be rejected and just delay your refund.
What was your most bone-head typo mistake you have ever made on your tax return?
5. Not Paying the Taxes Due
I'm not sure how often this happens, but I know it does. In Pennsylvania, taxpayers have to file federal, state, and local tax returns. We provide all of our clients with copies of these returns for their records. If they owe federal or state taxes, we also provide them with vouchers and an addressed envelope to send in their payments. Local returns can not be e-filed, so all of our clients are provided a return, W-2s, etc., and an addressed envelope to send to the local tax agency.
How do I know some taxpayers don't pay the taxes that are due? Simple. When they bring in last year's return to file this year's, I find all of the envelopes, vouchers, and forms still nicely tucked into the packet I gave them last year.
Moral of this story, pay your taxes when they are due. File any paperwork that you have to. If you send in a check, include the voucher with it and put your social security number on the check. If you can't pay, set up an installment payment arrangement with the IRS.
Was your tax refund:
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2012 Mark Shulkosky