February 23, 2015
36 Tax Filing Mistakes and How To Avoid Them
36 Tax Filing Mistakes and How To Avoid Them
Taxes are hard enough without being frustrated by an IRS notice. Most people freak out when they get an IRS notice, so below are 36 common mistakes and how to avoid them. This list is based on common mistakes listed by the IRS.
1) Not signing the return. Create a checklist based on this document.
2) Transposition and spelling mistakes. The best solution is to have a fresh set of eyes critically review the return. If you cannot do that, then wait at least a day, come back and look at the return using a reviewer mindset. Look at it once backwards. That way, you are just looking at numbers and words.
3) Unanswered required questions or unchecked boxes. Unfortunately, this is one of those reading the instructions to know what is required to be answered. If there is a question on your forms, it most likely requires and deserves an answer.
4) Failing to list estimated payments or listing incorrect amounts. You should maintain a worksheet throughout the year that lists all estimated payments made. At the end of the year, this should be used to include ALL estimated payments made.
5) Failing to include all pages of the return or listing them out of order. The return has a numbering system in the upper right. Make sure you have included all required form based on the instructions.
6) Not correcting items on the return that were disallowed on a prior notice. If you received a notice from a prior return and the items was ultimately disallowed, make sure your do not have the same issues on your current return. Failure to do this will likely result in another notice or an audit.
7) Underpaying or overpaying the tax liability listed on the return. The last section of page 2 of the form 1040 list the amount owed. Make sure that are sending a check for the correct amount, including any calculation of an underpayment penalty.
8) Send the return or check to the wrong agency. This happens more than you think, so make sure you are sending the return to the correct agency.
9) Not calculating the underpayment penalty. Your failure to pay penalty will be based on the liability from the prior year and may require the completion of Form 2210 to calculate any potential penalty.
10) Missing the penalty for the early withdrawal of an IRS or other pension. If your distribution from a pension or IRA is considered an early distribution (code 1), then you likely owe a penalty. Remember there are circumstances based on what the funds were used for that could reduce that penalty.
11) Calculating a penalty for an IRA or pension that was rolled over to another retirement account. The opposite is true here, if you rolled the funds into another retirement account within 60 days, there should not be a penalty. Note: You must roll the full amount distributed or there will be a penalty on the difference.
12) Not calculating self-employment taxes on net self-employment income. You are required to pay self-employment taxes on the net income from the self-employment activities. Failure to do this will result in an instant IRS notice and return recalculation. You are required to pay an additional 15.3 self-employment taxes on the total net profit from all self-employed activities combined. You will received an adjustment for one half of the self-employment taxes paid.
13) Responding to an email that you thought was send by the IRS. The IRS does not send emails to taxpayer, so if you receive that states it is from the IRS, it’s a scam.
14) Your paid preparer did not sign the return. If you had a paid preparer, that person is also required to sign the return.
15) Claiming the wrong number of exemption or failing to include the social security number. Make sure that you know who are eligible to claim as an exemption. If you are sharing custody, make sure you are claiming the exemption in the correct year. The IRS employs a matching system with the social security system, the name and social security number MUST match what is listed for social security. It is best to use the social security card to complete the exemption section of the return.
16) Claiming an exemption for someone who has claimed themselves on a previous return. A dependent may have filed their own return to receive a refund on withholdings. Make sure that dependent DID NOT claim their own exemption if you plan and are entitled to claim them as a dependent.
17) Omitting the social security number for someone you paid alimony to. You MUST list the social security number for someone that are claiming the alimony paid adjustment. Failure to do this WILL result in the disallowance of the adjustment to income.
18) Not itemizing deduction when you should have. If you are anywhere close to being able to itemize your deduction, you should spend the time to complete Schedule A. You are allowed to take the higher of, itemized deductions or the standard deduction.
19) Claiming mortgage interest on loans in excess of the allowable amounts. You may not deduct the mortgage interested for loans in excess of one million of your primary loan or 100 thousand of a home equity loan. Interest on loans in excess of these amount are NOT allowable.
20) Deducting point in full for a refinance. When you refinance a loan, you MUST amortize the points over the period of the loan.
21) Failing to deduct mortgage interest and property taxes on real properties. We have often seen new client to us that have failed to take these deductions on their rental properties. We have also seen people who have taken the deduction on Schedule A instead of Schedule E. Either of these would be incorrect.
22) Not claiming investment interest or not being aware of the limits. You are entitled to deduct investment interest incurred to purchase investment assets. The investment interest cannot exceed investment income. An amount disallowed should be carried forward. NOTE: Investment interest that was not carried forward can be brought forward.
23) Failing to list state taxes paid as an itemized deduction. State taxes owed and paid with the prior year’s return and withholdings in the current are both deductible. One or both of these are often missed.
24) Reporting deductions that stretch the limits.
25) Failing to carry forward items from prior returns. This typically happens when there is a change of tax preparer or a change of tax software. It means that the preparer failed to review prior returns for any carry forwards and or failed to ask good questions on the tax organizer.
26) Reporting state tax refunds received as taxable when the do not meet that tax benefits rule. Prior year refunds based on the tax benefit rule and should be calculated by your or your tax preparer’s software. The persona doing the return will need to input prior return information.
27) Missing the questions on Schedule B, regarding foreign accounts. This is an important requirement starting with the 2012 return.
28) Overstating charitable contributions. This is clearly on IRS’ radar, so do yourself a favor- DONE OVERSTATE CHARITABLE CONTRIBUTIONS.
29) Not having the proper receipts in your possession for the charitable deductions claimed. Without the proper documentation you should not claim the deduction. Most charitable organization are aware of the requirements and will voluntarily comply. If they do not, you need to request the documentation.
30) Reporting the incorrect tax on the net investment income. This is a complicated form stating with 2013 and is causing taxpayer issue. Make sure this form is properly calculated. If your income is such that this form is required, you probably should not be doing your own return anyway!
31) Failing to treat yourself as a real estate professional on real properties, if you qualify. If you send more than 750 hours operating or managing your rental properties, you should be listed as a “Real Estate Professional”. This has nothing to do with having a real estate license. Being a Real Estate Professional means that the limitations on real estate losses have been removed and could be a HUGE change on your return.
32) Reporting the incorrect cost basis on security sales. This happens more often than you would expect, especially if the securities were inherited.
33) Reporting gross sales from brokerage transactions that are less than those listed on all 1099s. No matching the total gross sales for all 1099s listed with the IRS is a guaranteed tax notice.
34) Not reporting the proper stock basis on employee stock options. Often employees purchase/sell stock option in what is known as a cashless transaction. This also means the stock gain has been grossed up in wages. The grossed up amount should be included in the basis of the stock options sold.
35) Failing to self correct, incorrect 1099s. This means, if someone issue you an incorrect 1099, it is your responsibility to see that it is corrected. If it is not corrected, you MUST still list that amount on your return and take an offsetting deduction to collect it to the proper balance. Be prepared to support your deduction.
36) Omitting contributions of IRAs, ROTH IRAs, SEPs or other retirement contributions. This are often missed deductions (IRAs and other retirement plans) or unreported items (ROTH IRAs).
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