Last year, the IRS assessed over $1.3 billion inaccuracy-related penalties. Making mistakes on your tax return can cost you both time and money, but there are steps you can take to avoid each one. In this blog, I will cover five of the most common tax filing mistakes and provide simple strategies to help you avoid them.
1. Filing at the Wrong Time
While most taxpayers know that filing their tax return late can cause penalties, it is also important to know that filing too early can also cause problems down the line.
The initial tax deadline for individual taxpayers is April 15. You can extend this deadline to October 15 by requesting an extension through Form 4868, but remember: 100% of your tax liability must still be paid by April 15. If not, penalties and interest may accrue. Filing after the deadline will cause a failure-to-file penalty, which increases the longer the return is overdue.
The IRS begins to accept and process returns in late January however, filing this early can lead to errors. Taxpayers receive documents from various outside sources including, but not limited to, their employer, banks and investment advisors. Though many of these documents are received early in the year, filing early in the tax season may cause a taxpayer to miss one of these documents or utilize numbers that are later changed or amended. This may cause issues with your return, and your taxes owed might change.
2. Selecting the Incorrect Filing Status
Each taxpayer must select a specific filing status which determines the correct amount of taxes that they are required to pay. Selecting the wrong status can result in overpaying or underpaying your taxes.
To determine the correct status, use the Interactive Tax Assistant – Filing Status provided by the IRS and consult with a tax advisor.
3. Missing Out on Tax Benefits
In addition to the standard deduction provided on each tax return, taxpayers may also be eligible for certain tax credits or itemized deductions. Failing to utilize these advantages may result in the taxpayer paying more money to the IRS than needed. Common itemized deductions that taxpayers can take advantage of are charitable contributions, real estate taxes, and medical expenses. Additionally, common tax credits include child and dependent care credit, child tax credit, and education credits.
The IRS Interactive Tax Assistant has topics that cover various credits and deductions and help you determine eligibility. For more personalized guidance, you can consult with a tax advisor.
4. Miscalculating Tax Payments
Individuals that expect to owe $1,000 or more will need to make estimated tax payments if their tax due is not withheld throughout the year. There are four payment periods throughout the tax year and if any of these payments are missed, you, the taxpayer, may also owe a penalty for underpayment of your taxes. This penalty will generally not apply if you paid the smaller of 90% of the current tax or 100% of the prior year tax (110% if adjusted gross income (AGI) was over $150,000 for married filing jointly (MFJ)) or if the taxes owed are lower than $1,000.
Estimated payments can be difficult to calculate, so it is helpful for you to either follow the safe harbor rules listed above or consult your tax advisor to help determine the correct payments to be made.
5. Entering Incorrect Personal Information
Another simple mistake that can occur when filing a tax return is making errors in personal data entry for important information like your Social Security Number (SSN), name and income information. Having an inaccurate SSN can cause issues when the IRS attempts to process your return and inaccurate income can cause you, the taxpayer, to owe more or less than what was calculated. To avoid this, it is important to double check:
- Social security numbers
- Spelling of names
- Income entries for wages, interest and dividends
Taxes can be complex, and the rules can be confusing, so it is important to follow these simple steps to mitigate the risk of mistakes.
To feel more confident about filing your taxes, consider contacting a tax professional or utilizing an IRS backed tax software. For taxpayers with an AGI of $84,000 or less, IRS Free File provides guided tax preparation software at no cost.
