Stupid Tax Mistakes To Avoid This Time Around
Confusion and stress often reign as the season to file tax returns and complete tax forms approaches. Taxpayers begin to imagine that the IRS is a malevolent monster that is preparing to devour them for even the smallest mistake or error in judgment on their tax returns. The confusion and stress are only amplified as most of us continue to postpone not only filing returns but also the preparation of records that must be done prior to filing until the very last minute.
I have found that my clients who wait until the very last minute to contact me and begin the tax preparation process are the very ones who end up forgetting to deal with major issues such as depreciation formulas, deductibles and proper understanding of tax laws are the very same clients who overpay or incur audits or penalties. Therefore, they are the ones who end up spending far more than they have to, either on tax payments or on fines, penalties and extensive legal and accounting advice.
Therefore, I remind my clients that the best way to avoid the errors which result in overpayment as they delay or block refunds, or even trigger an audit, is to make the tax record keeping process a continual and systematic process of organization. Since even the smallest errors or omissions can have costly consequences, I advise clients to organize any bills, vouchers and receipts that are tax related so that they can easily find them when it comes time to fill out their tax returns. I also recommend that clients become as familiar as possible with IRS rules and regulations so that they know what records they need to keep and for how long. Depending on others, even tax professionals, to keep you abreast of tax rules that pertain to your financial organization is not as effective as taking the time to learn what is necessary from IRS publications and websites as well as professional guides.
Everyone makes errors on tax returns, and I have assisted professors and top executives who overpaid in the past or who faced time consuming and costly audits after having made some of the most common tax return errors. These errors often cause those who make them to feel embarrassed, if not downright stupid, once they see how familiarity with the rules and taking a moment to keep better records could have helped them avoid these errors.
1. Claiming incorrect deductions related to dependent children. Lacking knowledge of the proper exemptions can mean that you fail to claim the right deductions, or make incorrect deductions that may lead to audits and other challenges. I remind my clients to check the proper definition of a child according to the 2006 rules put forth by the IRS; these are available at http://www.bankrate.com/brm/itax/tips/20010208a.asp. I also make myself available to clear any doubts or questions regarding these rules before filing a return, and urge anyone who needs assistance with this to contact a qualified tax professional before filing.
2. The bulk of errors on tax returns turn out to be calculation mistakes and improperly filled in figures. Checking and rechecking, especially where the decimal point and comma needs to be inserted, reduces the chances of submitting a return with calculation errors. It is best to review all figures and recheck them on two different days, or to ask a family member to review your calculations for any errors. Tax software programs which minimize the chances for error are available and are highly recommended. Remember that all details will be checked against W-2, 1099 and similar statements that are filed by employers and clients, and any discrepancy that is found will delay refunds and cause other problems.
3. I have been contacted by far too many taxpayers whose returns are not processed only because they failed to sign and date them. Checking all the pages carefully is the best way to ensure that you have not missed even the smallest detail that may prevent proper processing of your return. Forgetting to add your social security or tax ID number will also prevent processing of your return and therefore lead to delays and penalties.
4. Forgetting to submit all relevant forms such as the W-2, 1040, 07, or 16 is another common error that is considered very serious by the IRS. I always advise that clients check to see which forms are needed and then to make sure that they are attached to the return before submitting it.
5. When a client of mine forgets to keep track of investments, allowed deductions, interest paid and the like, I often find that they are unable to fill out a proper return and experience serious delays and problems with accuracy that can prove very expensive. Maintaining proper details and records of all investments, capital gains, tax payments made by investment managers and the like truly saves you time and money.
6. The 1040 EZ form is a shortcut that can be expensive for many taxpayers. I have advised even clients with simple tax returns to choose the full form so that they maximize tax savings and refunds. This is because the longer form allows deductions for student loan interest, alimony, charitable donations and other common expenses.
7. When you miss the April 15 deadline and request an extension, you are agreeing to pay late filing penalties as well as interest. If you absolutely must delay filing in April you still must submit form 4868 by April 15 in order to obtain a legitimate extension.
8. Using the wrong table to make calculations is a recipe for disaster, as is filing under the wrong status. Making these errors can mean double tax payments on investments as well as other overpayments. I always remind my clients to use only the worksheet at the back of the booklet containing the present year's tax return forms.
9. The most laughable errors made by taxpayers include not filling out the payment check properly or failing to sign it as well as mailing the forms without proper postage. Worst of all is not using the pre-printed label and envelope provided by the IRS.
Electronic filing is an ideal way to avoid the mistakes mentioned above, as the software programs include all necessary forms and include calculators that prevent errors. Since E-filings are processed more quickly, a refund can be mailed in as little as 14 days. Therefore, I recommend that my clients E-file and I am always available to assist them whenever the need arises; experienced tax professionals like myself prefer E-filing and use it whenever possible.
Filing on time and correctly, and being prepared well in advance of the filing date, is the best way to avoid the mistakes of the last minute rush as well as the costly consequences of even minor errors.
In today's world, you need to proactively plan for taxes and follow through with the right steps.
Ebere Okoye, CPA specializes in helping real estate investors save big on taxes, and build wealth. http://www.WealthBuildingCpa.com.