The US Tax Code is thousands of pages long. But even this only scratches the surface. There is also a massive number of pages of legal opinions!
As a result, even tax experts have little choice but to specialize. There is simply too much information.
So it is no surprise that taxpayers make quite a few mistakes every year. True, some of them are fairly minor. But in some instances, the consequences can be severe — leading to hefty penalties and interest. Or, in some situations, a mistake can delay your refund.
OK, so what are some of the common mistakes? What are the things to avoid? Well, let’s take a look:
Common Tax Mistakes to Avoid #1 – Typos
Even if your tax return is simple, there is likely to be lots of data input. This means there is potential for making mistakes.
One of the most common is entering a wrong Social Security, by transposing the numbers, for example. This is also the case with account numbers of direct deposits.
This is an understandable and likely expected mistake. But there is a less expected, but still common mistake in this vein: Inputting a wrong name.
Inputting the wrong name most often happens when a taxpayer gets married and has not legally taken the steps for a name change (you need to notify the Social Security Administration at 800-772-1213).
All in all, before sending off your tax return, make sure to do a double check.
Common Tax Mistakes to Avoid #2 – Rushing
According to a survey from WalletHub, people would rather do the following than prepare their taxes:
- Cooking a Thanksgiving dinner for their in-laws
- Change a baby’s diaper
- Talk to their kids about sex
So it any wonder that many people wait until the last minute to prepare their taxes? Of course not.
Yet this is often leads to problems. By rushing things, you are more prone to make errors. You also will likely miss important deductions and credits, which could mean losing out on thousands of dollars in tax savings.
Common Tax Mistakes to Avoid #3 – Not Filing
OK, suppose you procrastinate and you do not have time to file your return? Well, in this situation, you can file for an extension (this is done with Form 4868). This gives you six months to file your return.
However, you still need to make a payment for the taxes owed, which you can estimate. And if you cannot come up with the money, the IRS does provide options to help out, such as with installment plans and the use of credit cards.
Finally, there are some people who do not file a return because they think they do not have enough income. But this can also be a big mistake.
The reason is that you may be entitled to a refund anyway (because of the withholding from your employer).
Common Tax Mistakes to Avoid #4 – Not Hiring a Tax Professional When You Should
Yet there are times when you really need to get the help of a tax professional. Here are some examples:
- You got divorced.
- There is a death in the family that involves an inheritance.
- You purchased commercial real estate.
- You have income from multiple states or other countries.
- You have an adopted a child.
As for hiring a quality tax professional, do a background search — simply use Google — and make sure that he or she has a credential (the two main ones include the CPA and Enrolled Agent designations). You can also use the following directory to find a local tax professional.
Common Tax Mistakes to Avoid #5 – Report Your Income
When you earn self-employment income, you may receive a 1099-MISC. But there are some wrinkles. First of all, certain on-demand providers like Uber and Lyft are not required to send one out if the amounts are under $20,000. Or, in some cases, a company will fail to send a statement, even if required to do so.
Regardless of all this, you need to report all your income received. If not, you could be in hot water if the IRS makes an inquiry.
Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preperation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.