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7 Worst Mistakes You Can Make on Your Tax Return

Tuesday, April 02, 2013   (0 Comments)
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7 Worst Mistakes You Can Make on Your Tax Return

Taxes are tricky. Avoid these little slip-ups that can cost you big.

By Cari Wira Dineen
 

There’s no doubt about it: Taxes are tricky. And making a mistake can cost you big—in penalties, paying more than you need to, or by raising a red flag and prompting the IRS to audit you.

"Mistakes on your tax return often come from simply being confused,” says Jackie Perlman, principal tax research analyst with The Tax Institute at H&R Block. But there is help available. Through their Tax Counseling for the Elderly (TCE) program — "elderly" sounds alarmingly old, but it means age 60 and older in this case — the IRS offers free tax help with volunteers who specialize in questions about pensions and retirement issues unique to seniors. And if you earn $50,000 or less you might qualify for free tax return preparation through the IRS’s Volunteer Income Tax Assistance program (VITA).

Even if you hire a professional tax preparer, mistakes can still happen if you don’t give your preparer the right information. "If your kids or grandkids moved in with you, if you got married or divorced, or sold property, be sure to tell your preparer everything—and provide records and receipts—as life changes can influence your tax return,” says Cindy Hockenberry, EA, a tax expert and the Tax Knowledge Center Manager with the National Association of Tax Professionals (NATP).

If you’re filing your own return, double check it against this checklist from the IRS. Meanwhile, read on to find out how to avoid some of the most common mistakes made on federal tax returns.

1) Filing a paper tax return. It’s easy to botch basic math or forget to sign your name when you file your taxes on paper. But you don’t have to shell out a lot of money for a fancy tax software program or hire a tax preparer to up your chances for a filing a flawless return. Simply efile on the IRS website. "The computer program eliminates math errors, makes easy to include additional forms, and won’t let you file without putting in a PIN signature,” says Hockenberry. Click here to access the IRS Free File to file federal taxes for free.

2) Using the wrong name(s) and number(s). "Simple mistakes are easily avoidable if you take your time and double check your return,” says Perlman. Be sure that the names and Social Security numbers for you, your spouse, and any dependents (such as your grandkids if they live with you) are included on the return exactly as they appear on their Social Security cards. Cross your Ts, dot your Is, and make sure the basics are correct—or risk the IRS not accepting your return.

3) Picking the wrong filing status. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your standard deduction, eligibility for certain credits, and ultimately your correct tax. "But more than one filing status can apply to you and that can be confusing,” says Hockenberry. What if you’re separated, but still legally married? Or if you became a widow or widower last year? And how do you know if you are the head of household? If you aren’t sure about your filing status, don’t leave it to chance—or a kick-backed return. Take a quick interview on the IRS website to determine your correct filing status.

4) Not paying tax on Social Security Income. If you’re collecting Social Security benefits along with a pension or investment income, or continue to work either full-time or part-time, your Social Security is taxable, says Perlman. "If you don’t pay your taxes, the IRS can assess interest and penalties and even prosecute you,” adds Hockenberry. Even if you don’t have the money to pay the taxes you owe, be sure to still file, as not filing your return comes with even more penalties. Her advice: Sign up for voluntary tax withholding on your Social Security benefits to avoid the complicated mess next year.

5) Waiting for a paper check. If you wait for the government to mail you your refund check, it could take up to six weeks. Even worse, it could get lost or stolen in the mail. So sign up for direct deposit so you can get your return about two weeks after you file. "You can even have the IRS divide your return between several different accounts,” says Hockenberry. If you don’t know the correct numbers for your bank account or routing, call your bank.

6) Being too aggressive with deductions. For most taxpayers, the big three deductions are related to mortgage interest, charitable contributions or medical expenses. "But too often, people listen to what other people or friends are claiming and they think they can do the same,” says Hockenberry. Bottom line: You are not allowed deductions without substantiation. "If you don’t have proper receipts and records, you run the risk of the IRS auditing you, and then ending up with an additional tax liability,” says Hockenberry. Always seek professional assistance when in doubt if a deduction is legitimate, or if you need help determining whether you should itemize or take the standard deduction.

7) Filing late. Don’t think you’re going to make the April 15 deadline? Get ready to pony up more money. If you file late and owe tax, you will get hit with penalties and interest. For failure-to-file, the penalty is 5 percent for each month your tax return is late, up to a total maximum penalty of 25 percent. The failure-to-pay penalty is 0.5 percent of the amount of tax you owe for each month the tax is not paid in full. And you’ll also have to pay interest (currently 4 percent per year) for every month you don’t pay in full. Definitely due a refund? "There are no penalties for a late tax filing if you are due a refund,” says Hockenberry. Still, it’s better to be safe than sorry. Avoid late filing penalties and fees by filing for an extension. Just be aware that an extension of time to file is not an extension of time to pay.

 







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