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Statistics show that one in five self-preparers either pay more income taxes than they owe or claim exemptions they don’t qualify for. These often innocent mistakes are blamed on the growing tax code complexity that can befuddle even the most experienced professionals.
The most common errors costing taxpayers include: claiming the wrong number of dependents, failing to itemize deductions, overlooking qualifying medical expenses, reporting an erroneous cost basis, and overstating charitable gifts.
Income reports involving 1099s are another area where a number of discrepancies occur. The 1099 series are designed to prevent cheating by requiring payers to independently provide the IRS with income payments like interest, dividends, capital gains, and trust distributions. They also must report payments made to independent contractors, sole proprietors and the like.
An IRS computer matches these 1099 statements with information reported on a taxpayer’s individual income tax return. Taxpayers must make certain their returns and these 1099s report the same amounts. If a taxpayer receives a copy of a 1099 that is not correct, he should request the payor send a corrected 1099 as soon as possible before filing a return. This helps avoid an IRS correspondence audit (a letter pointing out the discrepancy and potential tax liabilty issue) and the related delay and costs associated with handling the audit. Unfortunately, even if that correction is not made in a timely manner, the taxpayer is still responsible for filing a tax return by the April 15th deadline.
Another common mistake is an easily avoided “oops” that likely occurs because it is simple. Tens of thousands of taxpayers file unsigned returns each year. If you overlook signing your return, the IRS may consider the return unfiled, and will withhold any refund until the matter is settled. However, if you owe taxes, the IRS will cash your check without delay then will wait to hear from you to finish processing your return.
While engaging a tax preparation professional reduces these risks, these professionals are not clairvoyant so taxpayers must do their homework to provide correct information.
