As tax time rapidly approaches and new rules and regulations are released, filing taxes accurately is critical for both individuals and businesses alike. Ensuring that your tax returns are accurate and precise reduces potential financial and legal repercussions. There are numerous mistakes practitioners make, which can be costly in terms of penalties and interest charges and may lead to audits and legal disputes. Also, tax filing errors can delay refunds and disrupt financial planning.
To help you better serve your clients, we're sharing the common tax filing mistakes and how to avoid them, as well as their consequences and methods of rectifying these problems.
Common tax filing mistakes
With the advent of tax software, most people would think that tax filing mistakes would be at a minimum, but that is not the case. Below are some of the more commonly found mistakes the IRS has noted over the years.
Incorrect client information
Submitting incorrect information is a very common and avoidable error. Make sure you validate taxpayer information, including their Social Security number, driver's license information, and other key details. Also, you must update your files regularly as clients may move, get divorced, or experience other life changes. Lastly, especially for new clients, look at last year's tax return to gain a picture of the taxpayer's overall tax situation.
Missing or incorrect income reporting
Missing or incorrect income reporting is unacceptable, especially with the IRS CP-2000 notice, which is generated by the IRS's Automated Underreporter (AUR) program. This program compares the information reported on a client's tax return with the information reported to the IRS by third parties (e.g., Forms W-2, 1099).
Ensure that all of these reported income sources are accounted for on the tax return. Also remember that while a CP-200 notice is not an audit, it can lead to one if the issues are not resolved. If you believe the client does not maintain good records, you can always request a list of all information from the IRS by filing Form 4506-I. Additionally, you may also request transcripts using Form 2848 or Form 8821.
Failing to ensure all income sources are complete
Make sure that you ask your client about the year, specifically asking the questions that the IRS would ask. By doing so, you can determine all the activities to report on the return, including wages, gig earnings, rental income, and investment returns. The EA or CPA should have a review checklist of questions to pose.
Using rental income as an example, make sure to keep detailed records of rental income, expenses, and time logs, especially if the client is claiming Real Estate Professional status.
Calculating errors in deductions and credits
Tax filing errors related to deductions and credits are common; practitioners must especially take note of those likely to contain errors in calculations and qualifications resulting in correspondence audits. The most likely deductions and credits include:
- Earned Income Tax Credit (EITC)
- Child Tax Credit (CTC)
- American Opportunity Tax Credit (AOTC)
- Premium Tax Credit (PTC)
Don't forget the home office deduction which is known for abuse and lack of substantiation. Practitioners need to file Form 8867, the Paid Preparer's Due Diligence Checklist, when preparing returns or claims for refunds involving certain tax credits and filing statuses. This form ensures that preparers meet due diligence requirements when determining a taxpayer's eligibility for these credits and statuses.
Omitting proper disclosures
Tax filings may require significant disclosures when participating in complex transactions, such as FBAR Reports to Reportable Transactions (Form 8886) to those which are more routine, such as Schedule Cs and Health Savings Accounts. The key to success is having tax preparer checklists which are available via the IRS website or through many tax databases.
Filing status errors
Avoid a tax filing mistake related to filing status by using the IRS guidelines to determine the correct option. For example, a single parent may qualify as head of household, which offers better tax benefits than single status. You should always double-check this.
Missing deadlines
Missing deadlines is a tax filing error that can be both financially and reputationally damaging. As the tax preparer, you need to be on top of this for your clients. You should implement a robust tracking system using tax software, which includes features for tracking reportable transactions and their associated deadlines. Further, the IRS has a calendar alert you can integrate into your calendar.
Record keeping
Make sure you maintain all records of income statements, receipts for deductions, and previous tax returns for at least three years in the event of an audit. You should also use digital tools to organize and store records securely. Encourage clients to maintain both digital and physical copies of important documents as well.
Implications and consequences of tax filing errors
While it is easier said than done during the hectic tax season, you can prevent tax filing mistakes by hiring a seasonal or contract tax reviewer to ensure accuracy before submission. Also, you should always conduct an audit of their work to prevent problems later on as tax filing errors can have several implications, including:
- Penalties and Interest: The IRS imposes penalties for underpayment, late filing, and inaccuracies. Interest accrues on unpaid taxes from the due date until the payment date.
- Delayed Refunds: Errors can delay the processing of tax returns, resulting in delayed refunds.
- Audits: The largest complication of tax errors, audits can be triggered by simply having a partnership's ending capital balance not agreeing with the next year's opening balance.
Take the time to file correctly and avoid these consequences.
What to do if you've made a tax filing mistake
If you've made a tax filing error, should you file an amended return or not? It depends on the mistake itself. Remember, filing an amended return can be a time-consuming process, and in many cases, it is unnecessary. The IRS has mechanisms in place to correct common errors such as math mistakes, missing forms, and minor personal information errors. While there is no crystal ball in predicting whether filing an amended return will result in an audit, the following errors are generally not worth filing an amended return for:
- Math errors: The IRS will automatically correct any simple math errors on your tax return during processing. You will receive a notification by mail if they made any corrections.
- Missing forms or schedules: If you forgot to attach a form or schedule to your tax return, the IRS will typically request the missing documents by mail.
- Incorrect bank account numbers: If you entered an incorrect bank account number for direct deposit, the IRS would issue a paper check instead. There is no need to file an amended return for this error.
- Errors corrected by IRS notices: If the IRS sends you a notice about an error on your return, such as a discrepancy in reported income, they will generally correct it for you.
- Minor errors in personal information: Missing or misspelled names or incorrect Social Security are usually handled by the IRS initiation.
Build your tax knowledge with Becker's tax courses
Whether you're a CPA needing continuing professional education or an EA needing IRS-approved CE, Becker can help you meet your requirements and build your skills. Consider these popular tax CPE courses
- Earned Income Tax Credit—Rules and Common Pitfalls
- S Corporations from A to Z: Getting Ready to Prepare the S Corp Return
- Real Estate Tax Update: Rentals and Home Office
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