Possible mistakes taxpayers and return preparers can make when filing returns are endless, and while some mistakes simply result in higher tax liability for the taxpayer at the time they file a return, other mistakes could create larger problems with the IRS in the future during an audit. Outlined here are some of the more common errors that can occur when preparing tax returns that taxpayers and tax preparers should be aware of.
1. Assuming the Wrong Due Date
We often think of April 15 as being the due date for individual returns (and some state returns), but that has not necessarily been the case in recent years, due to the day of the week April 15 falls on and state holidays, such as Patriot’s Day and Emancipation Day, that primarily affect taxpayers in Maine, Massachusetts, and the District of Columbia.
Generally, if a due date falls on a Saturday, Sunday, or legal holiday, filing a return is considered timely if it is done no later than the next day that isn’t a Saturday, Sunday, or legal holiday. In general, a statewide legal holiday delays a due date for filing a return only if the IRS office where you’re required to file is located in that state. For individuals, a statewide legal holiday also delays a due date for filing a return for residents of that state. However, a statewide legal holiday doesn’t delay a due date for making a federal tax deposit.
2. Submitting Incorrect Information Such as SSNs, EINs, Bank Account Numbers, and Name Changes
Taxpayers should take care to verify tax-related information such as SSNs, EINs, bank account numbers, retirement account numbers, and last names if recently married or divorced, etc., to ensure there are no transpositions of numbers or omissions/additions of digits. Such errors often fuel suspicion of filing false returns or deliberately providing false information in an attempt to either reduce tax liability or increase a refund amount. And, more simply, it can delay receipt of tax refunds if refunds are misdirected into the improper account(s) because incorrect information was provided on a return.
3. Confusion Over the Most Advantageous Filing Status
Taxpayers must determine their appropriate filing status, which will affect many things when filing a return. Filing status also is used to determine whether you are eligible to claim certain deductions and credits and the amounts of those deductions or credits. Taxpayers whose spouse has died or who separate or divorce but have children under the age of 24 or other dependents often are eligible to file as married or head of household, but care should be taken to consult the specific rules for each filing status. For many, more than one filing status applies and taxpayers should take the time to determine which is more advantageous. [See discussion on determining filing status at 507 TM, Income Tax Liability: Concepts and Calculation, II.B.; TPS 3310.04.]
4. Not Claiming the Earned Income Tax Credit (EITC)
The earned income tax credit benefits eligible taxpayers that work and have earned income under a certain amount. Because it is a tax credit, it reduces the amount of tax you owe, dollar for dollar, and it may also create a refund for the taxpayer, even if the tax liability is zero and no income tax has been withheld. [See discussion on the EITC at 513 TM, Family and Household Transactions, III.K.; TPS ¶3830.10.B.8.]
5. Failing to List All Information for Dependents
Failure to include all people who qualify as eligible dependents of the taxpayer may result in higher tax liability for the taxpayer and affect the taxpayer’s filing status. Taxpayers should carefully examine the requirements for claiming children, parents, and other relatives for whom the taxpayer provides at least half of their support in order to maximize eligibility for certain tax benefits such as head of household filing status, the child tax credit, the credit for dependent care expenses, and the credit for other dependents. Including correct birthdate information prevents delays in refunds or disallowance of certain tax credits. [See discussion on eligible dependents at 513 TM, Family and Household Transactions, III.B.3.; TPS ¶2830.03.]
6. Forgetting to Include Interest and Dividends
Taxpayers with multiple accounts or those that receive insignificant amounts of interest or dividends are likely to forget to include the amounts on their return, especially if they file their taxes early before all 1099s arrive in the mail. This results in the omission of income, which can lead to the imposition of penalties and interest on any additional amount owed that wasn’t accounted for on the original return. [See discussion on taxing interest and dividends at 501 TM, Gross Income: Overview and Conceptual Aspects; TPS ¶1010.03.]
7. Forgetting to Include Early Withdrawals From Retirement Accounts
When taxpayers make early withdrawals from retirement accounts, they often forget to include this information on their return, possibly because they filed early before they received Form 1099-R in the mail with all the pertinent information, or because they did not understand what the amounts in the boxes represented or the distribution code reported on the form. Taxpayers also often fail to account for the 10% additional tax on early distributions before age 59½ or whether an exception applies. [See discussion on early withdrawal from retirement plans generally at 370 TM, Distributions from Qualified Plans – Taxation and Qualification; TPS ¶5550.]
8. Failing to Include All Information From Schedule K-1
Taxpayers often fail to include all of the information reported on Schedules K-1 received from partnerships, S corporations, and LLCs. In some cases, the income is from a trade or business and is subject to self-employment tax (SECA), and in other cases, the income is from a passive activity and thus subject to passive activity rules. Items reported in boxes with corresponding letters often mean additional income or deductions, and also may impact state income tax reporting.
9. Failing to Deduct Charitable Contributions
Taxpayers often make charitable contributions throughout the year, but fail to report them at tax time, either because they forgot they made the donation (for example, they donated an old bike to Goodwill in an effort to clean out the garage), they felt the donation was insignificant (for instance, they donate small amounts to church each week, or they bought tickets to a charitable event for which part of the ticket price was a charitable donation), or they failed to get proper substantiation for a donation. Where a taxpayer itemizes, meticulous tracking of charitable contributions can help to lower taxable income. [See discussion on charitable contributions generally at 521 TM, Charitable Contributions: Income Tax Aspects; TPS ¶2390.]
10. Failing to Report Transactions in Cryptocurrency or Other Virtual Currency
Transactions in virtual currency (e.g., Bitcoin) are “hot” right now. But taxpayers must realize that cryptocurrencies are treated as property for federal income tax purposes and taxpayers must recognize any capital gain or loss on virtual currency transactions (subject to any limitations on capital losses). The IRS has a compliance campaign focused on cryptocurrency transactions, and has ramped up enforcement efforts in recent months. There is also a new question about cryptocurrency on the Form 1040. Please ensure that your clients are aware that they must report cryptocurrency transactions when completing their tax return to avoid problems in the future. [See discussion on cryptocurrency at 190 TM, Taxation of Cryptocurrencies; TPS ¶1410.10.]
11. Math Errors
Mathematical errors are common, and taxpayers should take care to check and double-check calculations reported on their returns, as well as any calculations used to arrive at those amounts. Taxpayers should also ensure that negative amounts are reported correctly on the return using parentheses or brackets, as opposed to using the minus symbol. Math errors often fuel suspicion of filing false returns in an attempt to either reduce tax liability or increase a refund amount.
12. Entering Amounts on Wrong Lines
Entering an amount on the wrong line of a tax form could be disastrous. This type of error could cause the taxpayer to report income where no income was received, or to erroneously include or omit the amount in another calculation. Taxpayers should take care to check and double-check their entries to ensure that all information is reported correctly.
13. Basic Filing Failures
Taxpayers should pay strict attention to the filing instructions when preparing returns. One of the most common mistakes is attaching forms in the wrong order (tax preparation software will handle this step automatically). Taxpayers filing by paper should note the Attachment Sequence Number in the upper right corner of each form and arrange the forms in numerical order accordingly.
Failure to sign a return, arranging forms in the incorrect order, or mailing the return to the incorrect IRS office may cause the return to be deemed unfiled or not processable. Taxpayers should always keep copies of their signed return for future reference, along with records and any other supporting documentation.