After New Year’s celebrations conclude, Americans need to focus on something less enjoyable: filing their tax returns. And, taxpayers make this process even more challenging when they make mistakes. As such, we’ll use this article to outline some common individual tax return mistakes – and how to avoid them.
Specifically, we’ll cover each of the following common mistakes:
- Tax Return Mistake 1: Incorrect Basics
- Tax Return Mistake 2: Not Filing a Timely Return
- Tax Return Mistake 3: Not Reporting All 1099 Income
- Tax Return Mistake 4: Incorrect Deductions and Credits
- Tax Return Mistake 5: Not Reviewing Your Final Return
- Tax Return Mistake 6: Not Keeping a Copy of Your Return
- Tax Return Mistake 7: Not Asking for Help
- Final Thoughts
Tax Return Mistake 1: Incorrect Basics
Ironically, the most common tax return mistakes people make don’t actually involve income. Instead, people frequently enter their basic personal information incorrectly. At best, this will delay your return. At worst, incorrect personal information can trigger an IRS audit. To avoid these outcomes, before submitting your return, make sure you’ve correctly entered all of the following information:
- Your full name
- Your social security number (SSN)
- Any dependents’ full names and SSNs
- Your bank routing and account information
- Your signature
To help avoid these basic mistakes, you can electronically import this information directly from your prior year’s return. This helps avoid typing errors.
Related to basics, individual filers need to ensure they use the correct filing status. A major life event (e.g. marriage, divorce, death, birth, etc.) can change your filing status. And, this status determines the rate at which the IRS taxes income, so making the wrong choice can lead to paying more or less taxes than you actually owe.
The IRS outlines five possible filing options:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
If unsure which filing status to use, a tax professional can help.
Tax Return Mistake 2: Not Filing a Timely Return
Individual filers frequently fail to file their tax returns on time. Individuals need to file returns no later than April 15th for the prior year’s taxes. For example, 2020 individual tax returns must be filed no later than April 15th, 2021. Most taxpayers don’t do this intentionally. Rather, people often wait until the last minute and then realize they’re missing a key document. To avoid this, get started early.
Alternatively, if you fail to file on time, the IRS will assess a failure to file penalty. Though the penalty calculations can become complicated, the baseline penalty includes 5% of unpaid tax required to be reported. As a result, you’ll eventually need to pay the taxes you owe plus this additional penalty.
Of note, you canrequest a filing extension. This allows you to file your taxes later than the standard April 15th deadline. But, even if you request this filing extension, you still need to pay your taxes on time. In other words, a filing extension does not give you a payment extension.
Tax Return Mistake 3: Not Reporting All 1099 Income
A variety of different IRS 1099 forms exist, each with a slightly different purpose. But, all of these forms report money given to you by someone besides your employer (e.g. freelance work, retirement account income, investment gains, etc.). Failing to report all of the 1099 income you receive almost guarantees an audit.
When someone generates a 1099 for money given to you, they need to provide you a copy of the form. And, the IRS also receives a copy of the 1099. As a result, the IRS has automated systems to compare the 1099 income it knows you should report with the 1099 income you actually report. Consequently, failing to report 1099 income on your return will trigger an IRS red flag.
Tax Return Mistake 4: Incorrect Deductions and Credits
A tax deduction reduces your taxable income. For example, if you had taxable income of $100,000, a $1,000 deduction would mean you only get taxed on $99,000. On the other hand, a tax credit serves as a dollar-for-dollar reduction in your tax liability. As such, if you owe $10,000 in taxes, a $1,000 credit would mean you only need to pay $9,000.
Bottom line, both tax deductions and credits can significantly reduce the amount of money you owe the IRS. And, related to this reality, tax filers frequently make one of two broad mistakes on their individual returns:
- Claiming inaccurate deductions and/or credits: This means that you pay less in taxes to the IRS than you actually owe. This can lead to penalties and, if done intentionally, criminal prosecution.
- Failing to claim rightful deductions and/or credits: This means that you pay more in taxes than you rightfully owe – something we all want to avoid.
A full description of every IRS deduction and credit is beyond the scope of this article. Rather, if you don’t know what deductions and credits you should claim, consult a tax professional. You don’t want to face either of the above alternatives.
Tax Return Mistake 5: Not Reviewing Your Final Return
Most Americans aren’t experts in the US tax system. But, this doesn’t exempt you from the responsibility to review your final return. Even if you complete your tax return with a professional tax preparer or tax software, you should conduct a final review. Reviewing a tax return provides two key benefits:
- It helps prevent major mistakes: You don’t need to be a tax professional to know that something just doesn’t look right. If you received a $1,000 refund last year but owe $5,000 this year, there may be a mistake. Or, maybe your income situation changed that much. Either way, you owe it to yourself to conduct a final review to make sure there aren’t any major mistakes.
- It provides an opportunity to educate yourself: In addition to helping avoid mistakes, reviewing your tax return every year should be a learning experience. Especially if working with a tax professional, a final review gives you an opportunity to educate yourself on tax basics that can help you save money in the future.
Tax Return Mistake 6: Not Keeping a Copy of Your Return
Generally speaking, the IRS advises taxpayers to retain copies of their returns and supporting documents for at least three years. And, in certain circumstances, you should keep them indefinitely. If you ever face an audit, you’ll need this information to defend yourself. You may not think this a likely outcome, but, as the saying goes: it’s better to have and not need than need and not have.
Tax Return Mistake 7: Not Asking for Help
The US tax code is anything but simple. Tax professionals spend years becoming experts, and even these people need to continue studying to stay on top of all developments. Accordingly, it’s okay to ask for help. If you don’t understand something, ask a tax professional for assistance.
Unfortunately, making mistakes when filing taxes can cause you tremendous headaches down the line. Even with honest mistakes, you can end up owing thousands of dollars in taxes, penalties, and interest while spending countless hours dealing with an IRS audit. Rather than facing these outcomes, ask for tax help when you need it.
Final Thoughts
We may not like paying them, but taxes are here to stay. Having said that, don’t make filing your individual tax return more difficult than it needs to be. Avoid the common mistakes outlined in this article, and ask for help when you need it.
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