Top 8 Mistakes On Tax Returns
A typo or unintentional error can become a significant problem when you file a tax return incorrectly. Here are a few tax return mistakes preparers have found when reviewing (taxpayer prepared) tax returns.
1. Not a dependent anymore
When filing a tax return, parents often claim their college-age children as dependents despite receiving little to no tax benefits. Allowing children to claim themselves as a dependent on their 1040 should be
investigated as children reach their junior or senior year in high school. There is a good chance they will qualify for credits their higher-earning parents wouldn’t.
2. Marital status
For example, someone filing a return married filing jointly when it was supposed to be married filing single. Even if married, look at head of household if certain conditions are met.
3. “Helpful” Tax Software
Garbage in, garbage out. The return will only be correct if the information inputted is correct. Taxpayers often depend solely on the tax software and just check the boxes without reading the directions. Tax software is not a substitute for a good tax preparer.
4. Failing to report cryptocurrency transactions
The IRS currently has a compliance campaign focused on cryptocurrency transactions and has ramped up its enforcement efforts in this area. Additionally, there is a specific question about cryptocurrency on the first page of Form 1040.
5. Pass-through problems
Not all business entities pay tax. Sometimes, the business owners do on net profits for their businesses. Choosing the wrong business entity can cause tax headaches when a taxpayer is unaware of them.
6. Forgotten interest and/or dividends
If multiple accounts produce interest or dividends and if the amounts of interest or dividends are insignificant, some of those amounts are likely to be omitted from the return. This is so, especially if the return is filed early before all 1099s arrive in the mail. Remember that because you did not receive a 1099, it doesn’t mean you do not have to report the monies earned as income.
7. Forgetting to include early withdrawals from retirement accounts
Making an early withdrawal from a retirement account without one of the exempted reasons draws a penalty.
8. Filing failure
Arranging tax forms in the wrong order, failing to sign, 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 that is easily overlooked. The entire return is potentially rejected if the forms are not in the correct order behind Form 1040, according to the Attachment Sequence Number.
Sometimes the taxpayer’s signature and or the date is inadvertently omitted, which is a common occurrence. Nonetheless, omitting the required signature will result in an invalid return. A return is only considered timely filed if properly signed and submitted. Remember that if there is a joint return, both spouses must sign the return to be valid.
Additionally, for taxpayers that moved in the past year, it is likely that the appropriate IRS filing office has changed. So, check the table at the back of the instructions for where to file the return.
Using an experienced tax prepare such as myself, Jeffrey Schneider, EA, CTRS, ACT-E, can make the difference between a correctly prepared return and one fraught with tax return mistakes. Contact us today.