The taxman comes every year and despite our collective familiarity with the process, there’s still a lot of room for error. Some mistakes are big, some are small, but they’re all preventable. Any oversight can be very costly, not only from a cash standpoint but also the time you’ll spend gathering supporting documents as well as getting papers signed and sent. Consider also that some tax debt owed to the IRS cannot be written off in a bankruptcy, and even for those tax debts that can, it can be very complicated. At Robinson & Henry, our tax attorneys have seen a lot of these slips, so we put together a list of ten common errors to help you try and avoid them.
#1. Filing Late
The most visible mistake is filing your taxes late. Tax day is April 15th every year (although technically there are some years it falls later due to the 15th falling on a weekend or holiday). Everyone knows the day, so there is no excuse for missing the deadline, but people who owe money may not be able to pay and will not file on time, hoping somehow it will buy them some time. It will not. The Internal Revenue Service (IRS) not only charges a failure to file fee as a percentage of the money you owe, they also levy a failure to pay fee along with interest. Hypothetically, if you owed $5,000 and paid one month late, you would need to pay an additional $306.59 in fees and interest. If your tax returns will not be ready by April 15th, you can file for an automatic extension but you still need to pay your estimated taxes by the 15th.
#2. Math Errors
The most common mistake is one of arithmetic, despite the abundance of electronic tax programs. If you find that you’ve miscalculated, the best course of action is to re- file using the 1040X Amended U.S. Individual Tax form. You have the ability to explain the reasons for the change and submit the documentation along with the difference in payment.
#3. Claiming standard deduction/not itemizing
The standard deduction is an amount set by the IRS that each person can claim on their tax return that ensures a portion of their income isn’t subject to federal income tax. While this makes for a simpler preparation of your tax forms, it may leave thousands of dollars on the table. The alternative to the standard deduction is itemizing your taxes, which steps through your allowed deductions item by item. When should you itemize? The general rules are:
- When you have paid large uninsured medical or dental bills out-of-pocket
- If you’ve contributed large amounts to charitable organizations
- You’ve suffered large losses from theft or natural disaster
- If you own a home and have been paying mortgage interest
- You have job expenses that qualify as write-offs
If your itemized deductions are larger than the standard deduction, it will reduce your tax burden – sometimes significantly. Additionally, the Government Accountability Office has found that over 2 million people overpay their taxes because they did not itemize their return.
#4. Missing a tax break/write-off
Tax breaks and write-offs account for a large failed opportunity to save on your tax bill. Tax breaks are a variety of deductions and exclusions that the government sanctions, from dependent exemptions to Social Security income. A write-off is different than a tax break in that it’s typically a business or education-related expense that’s deducted from your income when you itemize your taxes. For instance: Office supplies for the self-employed, tuition-related expenses, certain job search expenses, and energy efficiency upgrades. These are merely a few of the kinds of breaks and write-offs available. Some deductions are available for specific occupations, so make sure to communicate to your tax consultant every path for opportunities to save.
#5. Missing or incorrect information (SSN, name)
If you enter your Social Security number (SSN) or name incorrectly on your tax return, there are a couple of reasons why this mistake isn’t as bad as it used to be. First, in the age of digital filing, a mis-entered Social Security number is flagged very quickly. With electronic filing, you will merely need to correct the error and re-file. If you’ve sent
in your return, it may take longer to catch, but you will get notified by the IRS and will need to re-file. Second, the IRS cross-references data with the Social Security Administration and can catch name and number mistakes as they track the data. Be aware that many name-change mistakes happen around marriages or divorces, so if you find yourself in that situation, make sure you have everything sorted out before you file your taxes – or wait to make the name change until after tax season.
#6. Failing to report additional income (winnings, consulting)
Just because you won some money at a casino or a sweepstakes entry, don’t assume the IRS doesn’t know or care about it. Depending on the amount won (and from which method), you may need to file a separate form. Casinos and sweepstakes operators are required to report the winnings or cash equivalents. You will receive a 1099-MISC form the year after your winnings. All of this to say that the IRS isn’t just relying on you to report your additional income – they have ways to verify it. This also applies to consulting fees, freelance work, and earnings from a hobby. While you may not make enough money to pay taxes, you are obligated to report all income. If you are caught underreporting your income, the IRS can levy penalties of up to 75% if they determine that it was intentional, and they may choose to prosecute. Tax evasion can be punishable by up to five years in prison and a $250,000 fine.
#7. Incorrect Filing Status (head of household, single/joint married, dependents)
Many times, filing status can be a simple mistake, which the IRS will help you correct. However, purposefully filing incorrectly can have serious consequences, as we will show. The most common fraudulent filing status is Head of Household because it allows for an expanded range of tax breaks and credits, and also increases standard deduction, which more frequently leads to a tax refund. Head of Household is only able to be claimed under a specific set of circumstances and is typically a divorced parent: unmarried; has a qualifying dependent who has lived with them for over 6 months of the year; has paid over 50% of the rent and upkeep costs for the home for themselves and the dependent. Fraudulently claiming HoH can result in repayment of refunds along with fines and interest. The IRS can also bar you from filing Head of Household – even if you qualify – for 10 years. However, if you find you’ve innocently filed incorrectly, contact the IRS and submit an amended return.
#8. Not planning for payments/assuming will be getting a refund
This is another common error that can catch people by surprise when they become accustomed to a certain pattern in their taxes but don’t consider or account for changes in their lives, such as marriage, divorce, acquiring property, changing jobs, or losing the ability to claim a dependent. Conventional wisdom suggests that you shouldn’t be getting large refunds anyway, because that means you’re overpaying during the year. If you don’t plan for payments due to any number of these life changes, you could be in for a surprise tax bill of thousands of dollars. If you do end up with a sizable tax bill, contact the IRS about a payment plan.
#9. Not signing forms
Another low-penalty error, but it can be quite an inconvenience. If you e-file, you can sign the form electronically and eliminate the step of printing and signing a physical sheet of paper. If you file a printed copy of your tax return and neglect to sign, the IRS will contact you and request your signature (along with your spouse, if you are Married Filing Jointly) before processing the return. You will not be assessed a late fee if you submit payment, but if you are expecting a return, that may be delayed by weeks or months while the IRS works through receiving your return, requesting the signature, and reprocessing the return.
#10. Not filing at all
Only in certain circumstances do people not need to file a tax return, and those are typically in cases where income is very low, well below the poverty line. If you are above the income threshold and don’t file a tax return – for whatever reason – you may face stiff fines and penalties, as discussed earlier in the section on filing late. The best- case scenario if you haven’t filed your taxes is to come to the IRS with a plan to file and pay any taxes, penalties, and interest owed. They may not prosecute if you haven’t engaged in fraudulent activities related to your non-filing.
Not all of the above scenarios are serious issues in the eyes of the IRS, but they all need to be corrected. An experienced tax attorney can help formulate a plan for contacting the IRS and may be able to stand in for all communication, eliminating another source of anxiety. Also understand that a tax attorney has experience and skill that a general attorney or tax preparation service will not have, which can make a significant difference when dealing with the tax court. The Ostrich Strategy of sticking your head in the sand is not recommended – the earlier you come clean and deal with your tax problems, the sooner you can get on the right track and resolve the stress that surrounds lingering tax issues. Call 303-688-0944 for an initial, consultation.