Article
Common Mistakes in Tax Preparation
REFERENCE SHELF
PAGE: 2022 Tax Calendar
REPORT: Quick Tax Reference Guide
REPORT: Cryptocurrency: From the IRS to the SEC & Beyond
REPORT: 2021 Individual Tax Planning Guide
Preparing a tax return involves avoiding a multitude of potential errors. While some mistakes result in a simple recalculation of the tax liability, others can trigger a full-blown IRS audit. Knowing the most common tax-filing blunders is critical to prevent mistakes and the serious headache that results in IRS scrutiny that can lead to an assessment and interest and penalties. 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
April 15 is no longer a “blanket due date” for all individual federal returns (and some state returns), although it is the case for most taxpayers. Generally, if a due date falls on a Saturday, Sunday or legal holiday, filing a return is generally considered timely if it is filed no later than the next “business” day.
At least two state holidays sometimes affect the normal federal tax return due date. Emancipation Day is a holiday in Washington, D.C. observed on the weekday closest to April 16. Another holiday is Patriots’ Day which is celebrated in Maine and Massachusetts on the third Monday in April. For Patriots’ Day and Emancipation Day, special rules apply. For Emancipation Day, when April 15 falls on a Friday, tax returns are due the following Monday. For Emancipation Day and Patriots’ Day, when April 15 falls on a Saturday or Sunday, tax returns are due the following Tuesday.
If you are required to file in a state celebrating a legal state holiday that lands on April 15, then the state tax filing date would change, but generally only at the state level. In other words, it is possible for you to have two different filing due dates: one for state, and one for federal.
[Stay up to date on the IRS calendar and key filing dates with our 2022 Tax Calendar.]
2. Wrong Information (SSN/EIN, bank account numbers, etc.)
Check and double check the social security number on the return because that number represents the taxpayer’s identity to the IRS. Also, when the employer reports the W-2 information or the taxpayer’s bank or other financial institution reports the 1099 information, there will be trouble with the IRS if they don’t match up to the return.
If you are e-filing your taxes and using direct deposit, the refund generally comes back in a few weeks which is fast and easy. But it’s only fast and easy if the right information is provided. So doublecheck that all bank routing and account numbers are accurate. If you need help figuring out the correct information, ask your bank.
3. Forgoing most advantageous filing status
Filing status determines a taxpayer’s tax rates and certain allowance, deduction, and exclusion amounts. Sometimes, the best filing status is quite obvious, but not so much in other cases. For example, if your spouse recently died or you have recently separated or divorced, and you have children or other dependents, you may be eligible to file as either married or head of household.
Married couples also need to examine if it is most advantageous for them to file separately or jointly, but that is not always strictly a tax consideration.
4. Forgetting to include interest/dividends, especially if filing early before all 1099s etc. arrive
If there are multiple accounts that produce interest or dividends and/or if the amounts of interest or dividends are insignificant, some of those amounts are likely to be omitted from the return, especially if the return is filed early before all 1099s arrive in the mail.
Omitting these amounts generally result in the omission of income, which can lead to imposing penalties and interest on any additional amount owed that wasn’t accounted for on the return.
[For standard deductions, ERISA, Tax Code Pensions, standard mileage rates and more, visit our 2021/2022 Quick Tax Reference Guide.]
5. Forgetting to include early withdrawals from retirement accounts
Making an early withdrawal from a retirement account absent one of the exempted reasons draws a penalty. Usually, the taxpayer that makes this kind of withdrawal is experiencing some real financial hardship and often forgets to provide this information to their accountants or to account for it when doing their taxes. Further, they fail to account for the 10% additional tax on early distributions before age 59 ½. Omitting such information from the return will generate a letter from the IRS stating the taxpayer owes an additional tax on that amount, plus the interest and penalties that have accrued on that additional amount until payment is made.
6. Failing to deduct charitable contributions properly
Charitable contributions must be tracked and substantiated. Taxpayers often miss out on this important deduction because they failed to obtain and/or maintain proper documentation. For weekly donations to church or other religious institutions, regular members are generally provided a year-end statement with the total of their contributions but given the volume of such statements provided by the institutions, discrepancies can occur even in these records, so taxpayers should also keep their own records.
Many taxpayers mistakenly try to claim the time that they donated to a charitable organization (which is not tax deductible), however they often overlook out-of-pocket expenses, such as mileage accrued on their vehicles while volunteering which is tax deductible.
Another common charitable donation mistake happens when taxpayers receive a benefit such as receiving event tickets in exchange for their donation. They often (and mistakenly) try to claim the full amount of their cash contribution without subtracting the fair market value of the tickets. The full deduction is available only if the taxpayer refuses the tickets.
[Take your planning to the next level with our tax research solution – up-to-the-minute news, analysis, primary sources, tools, and more]
7. Failing to report cryptocurrency transactions
Transactions in virtual currency like Bitcoin are ever increasing. It is important to remember that cryptocurrencies are treated as property for federal income tax purposes and any capital gain or loss on virtual currency transactions must be recognized, subject to any limitations on capital losses. The IRS currently has a compliance campaign focused on cryptocurrency transactions and has ramped up their enforcement efforts in this area. Also, there is a specific question about cryptocurrency on the first page of Form 1040 that reads – “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Please check this box and report the related amounts, as appropriate.
[Stay up-to-date on Cryptocurrency with Bloomberg Tax Research’s Report: Cryptocurrency: From the IRS to the SEC & Beyond]
8. Math errors
One of the first areas that the IRS checks on a tax return is math, especially on those first two pages of the return. If a paper tax return is completed and filed by hand, it’s easy to miss a number or two, so go slowly and double-check the math.
9. Filing failures: Arranging tax forms in wrong order, failing to sign, not keeping copy of signed return, mailing to incorrect IRS office, attaching W-2s and 1099-Rs
Believe it or not, if you’re filing a paper return, it matters the order that the tax forms are presented when filed with the IRS. In the upper right-hand corner of many forms other than the 1040, there is an Attachment Sequence Number which is easily overlooked and the entire return potentially is rejected if the forms are not in the correct order behind Form 1040 according to the Attachment Sequence Number.
Sometimes in the rush to get the return in the mail, the taxpayer’s signature is inadvertently omitted which is a very common occurrence. Nonetheless, omitting a required signature results in an invalid return. A return is only considered timely filed if properly signed and submitted. Keep in mind that, if there is a joint return, both spouses must sign the return for it to be valid.
It is important to make a copy of signed tax returns, as applications for many common types of loans, including mortgages and student loans, require past tax information.
If the return shows a balance due, payment must be included – a check or money order payable to the “United States Treasury” – that includes the taxpayer’s name, address, social security number, daytime telephone number, tax form, and the tax year relating to the payment.
Also, for taxpayers that moved in the past year, it is likely that the appropriate IRS filing office has changed, so be sure to check the table in the back of the instructions for where to file the return.
10. Failure to enclose negative amounts in parentheses
Negative amounts on the federal return are to be indicated with parentheses; don’t use the minus symbol. This ensures that IRS computers read the negative entry correctly.