It’s worth your time — and money — once you’ve completed the necessary forms, to double check on them. Why? Millions of taxpayers commit mistakes when preparing and filing their returns, errors that cost them hundreds to thousands of dollars. Even if you hire the services of a professional tax preparer, that won’t guarantee you an error-free tax return…
A few months ago, the Government Accountability Office (GAO) conducted a study on tax return preparation preparedness, and here’s what they found (via Macon.com)
The GAO found problems with all 19 of the selected paid tax preparers…The errors reported in the GAO study include too many exemptions claimed, incorrect state tax refund amounts, failure to itemize deductions when beneficial to do so and failure to claim tax credits and other allowable deductions that would have reduced the amount of tax owed… Since tax preparation errors can be costly to correct, simply put, it is best to file a complete and accurate return in the first place.
Whether you have a tax guy to do the dirty work for you or not, it’s imperative that you know which tax mistakes can cost you a fortune, so you can avoid them.
The Mistakes
Math errors
Basic arithmetic errors rank as the number one mistake of taxpayers. Take it from the IRS, which says that the average 1040 form contains dozens of math miscalculations. These include basic errors in addition and subtraction. You can completely rid yourself of these math boo-boos by using tax preparation software (see the article and review).
Also, watch out for numerical errors not involving calculations, as in transposing digits (e.g. putting $56,087 instead of $50,687).
Overlooked deductions
First off, it’s better to itemize your deductions instead of taking the standard deduction. The GAO estimates that there are more than two million taxpayers who overpay their taxes by not itemizing.
If you already itemize your deductions, make sure you’re squeezing every cent out of them. Some important deductions you won’t want to overlook are:
- Charitable contributions (donations)
- Health insurance premiums
- Medical expenses
- Traveling and mileage expenses (e.g. tolls paid)
- State sales tax or state income tax deduction
- Volunteer work expenses
- Investment expenses
- Home office expenses
- Electric vehicle credit
- Gambling losses
- Expenses for cleaning your work clothes/uniforms
- Clean-fuel deduction (for hybrid car users)
- Bonds-buying expenses
- Job-search expenses
- Job expenses not reimbursed by employers
- Education expenses
- Tax return preparation expenses
Read our related article on tax deductions.
Overlooked documents
Don’t forget to attach all informational forms to your tax return. These include all W-2 and 1099 forms that show you had taxes withheld from those accounts. If you had more than one employer, don’t forget to attach wage statements from all employers.
Tax form errors
These include lines you forget to fill in, entering information on the wrong lines, or spelling errors. Watch out for these mistakes:
- Social security numbers that are incorrect, missing, or don’t match your name.
- Missing signature/s. Sign and date your tax return; if it’s a joint return, make sure your spouse’s signature is there, too.
- Wrong or no filing status. Read the instructions to make sure you qualify for a certain filing status…and choose only one!
- No exemptions entered. Also, make sure to enter the correct social security numbers for each listed exemption.
Refunds
Receiving big tax refunds — money sent back to you by Uncle Sam because you paid too much tax or withheld too much from your salary the previous year — is actually bad, because that means you didn’t optimize your tax return.
Minimize your tax refunds by adjusting your withholdings. One way to do this is to claim more withholding allowances so you can reduce your withholdings.
Also, don’t avail yourself of those refund anticipation loans! They make profit for the loan companies, not you. Know more about tax refunds.
Deadlines
This is very simple advice: Don’t miss the deadline for filing your returns! Don’t get charged a penalty for filing late. If you can’t make the deadline (April 17 for this year, 2007), you can file an extension. This article shows how easy it is to file an extension.
Not thinking about taxes all year round
If you enjoy a fixed monthly income, then half your problem’s solved. But if you’re self-employed and have a fluctuating monthly income, recording them dutifully is imperative for a less hassle-filled filing time.
The other half of the problem lies with tax deductions. You’ll need to keep tabs on your receipts, donations, health bills, and other pieces of evidence all year round!
Not thinking about taxes at all
No, paying taxes is not optional. Believe the wise guys who say otherwise, and you might find yourself in trouble with the IRS. When it comes to the point that you’re receiving mail and notices from the IRS, take action and prepare your returns. Do not ignore those letters. Let us repeat — do not ignore them.
If you’re making money off the Internet (either as a hobby or part of a home-based business), you’ll still have to pay taxes. This Entrepreneur.com article on eBay taxes will help you out.
Falling for tax scams
Scams. Why are they so popular? Because they work for the scammers — they ensnare lots of unsuspecting people every year. Know your foes and avoid them. These three links will give you plenty of info on prevalent tax scams:
Fixing the Mistakes
How can you rectify the tax errors you’ve committed, if any? You can revise your tax return by using the Form 1040X. This form allows you to, among others:
- Recalculating any extra amount you owe the IRS
- Recalculating any extra refund you are entitled to
- Claiming additional or removing previously claimed dependents
- Changing your filing status
Also, a great way to minimize typographical errors, math errors, and overlooked deductions is to use tax software, consult a tax adviser, and hire a tax professional to prepare your returns. Just make sure you also check on the pro’s work when he’s done!
Best Practices After Tax Season
After tax return filing time has passed, don’t slack on watching over your income/s and possible tax deductions. Record them all dutifully, to avoid cramming the next tax season.
Don’t forget the just-finished tax return and your experience in filing it. When preparing next season’s return, review the previous one. It should remind you of which deductions to use, as well as guide you in properly filling up the lines, filing status, and signature/s.
Keep yourself up to date with tax-related news and notices issued by the IRS. These include changes in filing status qualifications and tax deduction updates. And last but not the least, spend time reading and re-reading tax help articles like this, even when it’s not close to tax return filing deadline. The better you get acquainted with tax mistakes, the better your chances are for more dollars saved!
Thanks so much to the authors of www.TaxInformation.org for contributing this article to the Good News Network!