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Here is list of common tax filing errors grouped into different categories. There is no use to discuss about problem without poviding solutions to fix them and that what you can find here.
Math/Typo related error
- Check your math
The tax calculation error is very common for manually prepared tax returns. Use a standard tax software to avoid them
- Wrong SSN
Double-check all social security numbers (yours, spouse, dependent, etc) entered in each page of tax return form and other attached forms before filing your tax return. The SSN number should match the name in the social security card.
- Missing attachments
Check whether required attachments such as schedules, W-2 copy, statements, etc are attached to the tax return before filing. Always include your name and Social Security number on each attachments.
- Error in spelling of dependent's name
- Write your SSN on the face of checks
Be sure to sign your check and write your social security number, the form number, and the tax year on the face of any checks made out to the IRS.
- Filing tax return with incorrect W-2 or Form 1099s
Be sure that your Form W-2 and all Form 1099s are correct. If they're wrong, have them corrected as soon as possible so that the IRS's records agree with the amounts you show on your return.
- Not keeping tax return records
You need to maintain proof of timely filing your tax return. Make copies of the tax return and all the supporting documents and attachments before sending to IRS.
- Not signing tax return
Make sure to sign and date your return. If you are filing a joint return, be sure that your spouse also signs as required.
- Failure to list occupation
IRS requires you to enter your occupation while filing tax return
- Put the correct postage on your envelope.
If your return is sent back to you because of insufficient postage, you are liable for the penalties and interest if the postmark on the re mailed return is after the due date.
- File your original return. Do not file a photocopy
Dependents
- Claim ineligible dependents
Make sure you can claim a person as your dependent by following the IRS dependency test.
- Failure to claim an eligible dependent
Check that you have claimed all of your dependents, such as elderly parents who may not live with you.
- Claiming a newborn that does not yet have a Social Security number as a dependent
Filing Error and Filing status
- Choosing the wrong filing status
Check the IRS instructions to determine the correct filing status your tax situation. If you are single and have a dependent who lives with you, check to see if you qualify for the lower tax rates available to a head of household or qualified widower. These filing status will give higher tax deduction.
- Filing no return when a refund is due
- Failing to check alternative minimum tax liability
Income
- Not reporting wages
Even if you don't get W-2 from your employer because they went out of business, you are required to report the income.
- Tax on Social Security
Only a portion of your social security benefits may be taxable. If your income does not exceed a certain amount, none of it may be taxable.
- Not reporting Social Security Income
Your social security benefits may be taxable depending on many factors like your gross income, age, etc and you need to report your Social Security Income in your tax return.
- Declaring your state tax refund as income
You need to report previous year state tax refund as income only if you receive a tax benefit by itemizing your taxes last year. Don't report it if you used standard deductions last year.
- Not paying and reporting nanny tax
Failing to pay and report domestic payroll taxes for domestic employees like nanny, household employees, etc.
- Failing to report taxable income
Failing to report taxable income either purposefully or due to oversight.
- Not reporting unemployment income.
The unemployment income is taxable and you need to report while filing tax return. You may get some exceptions from your state tax returns as different state got different rules regarding the unemployment income.
- Not reporting excess employer benefits
Employer sponsored benefits like premimum payed by the employer for group life insurance become taxable, if the insurance amount is above $50,000 per annum. If you work for only one employer then they will report this in your w-2. But tax filing error will occur if you work for more than one employer and you receive life insurance benfits from both employer and the combained amount is greater than $50,000. You need to calculate the taxable insurance premimum and report it.
- Not knowing if your tax-exempt interest income is taxable in your state.
- Not Factoring in Dividends and Interest Earnings
Deduction/Credits
- Improperly claiming the EITC
You cannot claim EITC if you file as married filing separately. You need to have a qualifying child and need to pass the income tests before you can claim EITC.
- Failing to claim the EITC
Missed out to claim EITC due tax preparer error, lack of knowledge about EITC, etc.
- Overpaying your Social Security taxes
If you worked for more than one employer and your total earnings exceeded $94,000, you may have overpaid your Social Security taxes. Check the 1040 instructions to claim a credit.
- Not keeping charitable donation documents
For charitable donations of $250 or more, contemporaneous written acknowledgment from the charity is now required. When your non-cash contribution exceeds $500, you also are required to file IRS Form 8283, Noncash Charitable Contributions, giving details of the donation.If your gift was one of property rather than cash, the acknowledgment must describe the property.
- Failing to do Appraisals for contributions of $5,000 or more
You need to do an appraisals for contributions of $5,000 of more and it must be included with tax return.
- Failure to claim carry over deductions
Certain deductions like charitable contributions or capital losses are limited in the year it occurred, but carried over to next year is allowed. Check your previous year's tax return to see if there are any items that were carried over to this year and you can claim them in your current tax return
- Not claiming a deduction for losses suffered in a declared national disaster area.
If the president has declared your area a disaster zone, then you can claim any losses occured due to disaster.
- Deducting gambling losses in excess of winnings
- Taking the standard deduction when itemizing would entitle you to greater deductions.
- Miscalculating the child- and dependent-care credit
- Failing to contribute before the tax year ends.
You need to contribute the maximum to your retirement account before the year ends. Some accounts allow you to as late as your tax return filing date, or even later. But ut
Business
- Treating employees as independent contractors
Purposefully claim an employee as contractor to avoid the employee taxes by business.
- Incorrectly classify money spend on the rental property
The money you spend on the rental property need to classified properly as expenses or as capital-improvement deduction.
- Wrong tax basis for shares of mutual fund
Income and capital gains dividends that were automatically reinvested in the fund over the years increase your basis in the mutual fund and thus reduce a gain or increase a loss that you have to report. Also any "front end" or purchase fees are still considered part of your cost basis for tax purposes, even though they reduce your investment in a mutual fund.
- Not saving receipts of business entertainment expenses less than $75
You are not required to keep recepits for these expenses but in case IRS audit you may have to produce documents to prove these as business expenses.
- Incorrectly classify capital expenditure and supplies
Supplies are expenses which you have deduct and the capital expenditures have to be depreciated.
- Forgetting to track deductible expenses.
Many small-business owners pay for some business expenses with cash out of their own pocket or through a personal credit card and forget to updates their books.
- Giving more than you can receive
Claiming very high value deductible business gifts.
Divorce
- Not Following the Rules for Alimony
Alimony is deductible to the payor and taxable to the payee.
- Failing to negotiate dependency deductions
In a divorce or separation, the custodial parent gets the exemptions. If the custodial parent is in lower income bracket, then the tax savings from the personal exemption will be less. The value of exemptions starts to phase out for income above $145,950 for a person filing as single, so the exemption may only be effective for a lower earning spouse. Don’t forget to factor in the child tax credit ($1,000 for each child under age 17) and dependent care credits for up to 2 children under 13 ($960 or more).
- If you're divorced, both parents claiming the same child as a dependent.
- If you're divorced, failing to take advantage of the full $500,000 home exclusion
If you and your ex-spouse lived in a house for more than 2 years and your divorce or separation agreement grants both to use the house, then a full $500,000 exclusion is available while selling the house. If a spouse who is the sole owner remarries, the new spouse must live in the house for two years to qualify for the full $500,000 exclusion.
- Not writing off the cost of your divorce
If you are unfortunate to get into divorce, you will be able to write of the costs attributable to tax and financial advice you receive from your attorney as miscellaneous deduction in schedule A(Itemized Deductions). Get a statement from your attorney separating the fees for legal services and for financial advice services. Normally the deductible portion of your divorce runs from 1/3 to ½ of the total cost.
Tax Professionals Errors
You are responsible for your tax return no matter who prepared it. IRS and GAO conducted study of the retail tax preparation chains and reported that they made many errors while calculating the tax returns. Even IRS trained volunteers at VITA are no exceptions. Some of the common tax preparation and filing mistakes done by paid tax prepares are listed in this section
- Tax preparers cheating on your tax return to provide huge tax refund
Beware of tax professionals who promises huge tax refunds which you know you are not eligible for. They do so by manupulating your taxes either not reporting side income or by claiming an ineligible child, etc.
- Taking refund acticipation loan and other short term loans linked to tax refunds
When you e-file your tax return you get your refund in less than 2 weeks. Tax preparers who sells RAL charge huge fees and very high interest rates on these loans. You may be even better of to pay your credit card than paying these fees and interests.
- Use the right tax rate table when calculating your tax liability
How to avoid errors
- Taxpayer should always carefully read all instructions to the tax forms and schedules and understand what they are doing.
- Review the entire return before filing
- Use one of the standard tax software suitable for your tax situation
- Always use e-filing when ever possible as it will help to reduce some errors and speed refunds
- Always use e-filing when ever possible as it will help to reduce some errors and speed refunds
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