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Filing Taxes? Watch Out for these Common Mistakes!
The biggest testing time for businesses around the world is the time when they start preparing and filing taxes. With so many regulations to keep in mind while filing taxes, it gets extremely difficult for business owners to make zero tax accounting mistakes while managing operations simultaneously.
Any tax return mistake can prove to be costly for firms as they may face an Internal Revenue Service (IRS) audit, additional taxes/penalties, miss out on a bigger claim refund, and more. So, let us explore the same and learn about the common tax filing mistakes that are committed by taxpayers.
- As per the IRS’s statistics for the 2018 fiscal year, approximately 2.5 million calculation errors were found on the 2017 tax returns filed.
- IRS revealed that the error rate is much lower in e-filed returns (1%) as compared to paper returns (21%).
- The IRS catches and fixes simple mathematical mistakes in the tax returns like addition and subtraction on its own.
- Most of the tax returns are processed within 21 days by the IRS, and these are generally the ones with no major tax filing errors.
12 Common Tax Filing Mistakes Explained
1. Missing the Tax Filing and Payment Deadline
Missing out on the tax filing deadline is one of the biggest and most common mistakes made by taxpayers during tax filing. One must stay updated with the recent tax filing date through the use of software, an accountant, or regular IRS website visits.
Now, another mistake that people make is of missing the payment deadline. Just because you have obtained a tax-filing extension, it does not mean you get an extension for payment as well!
2. Neglecting Carryover Losses
There are times when taxpayers forget to include the carryover losses of their last year’s tax return. This restricts them from becoming eligible for the related set-off in the current tax year.
There can be a number of reasons for this to occur, with taxpayers hiring a new CPA to take care of the accounting tasks, migrating to the latest tax return software or buying a new computer, and more.
3. Not Focusing on Tax Withholdings
Filers make the mistake of not focusing on their tax withholdings for planning accordingly and instead wait for the year-end to figure out if their tax withholdings need to be adjusted or not. The problem persists when taxpayers witness a huge tax bill.
Calculating your yearly income and adjusting withholdings in accordance with it will significantly bring down unexpected tax-time surprises.
4. Filing along with Tax Filing Dependents
There are times when parents file their returns mentioning their children as dependents, but those children also file tax returns against a part-time or summer job they did.
It is vital that you make your kids know of the same and ask them to specify in their tax returns that they are dependents on the tax return filed by their parents to avoid filing rejection.
5. Not being Updated with the Latest Tax News
Taxpayers are so busy with their work that they do not have time to stay updated with the latest tax news. However, this can prove to be very costly. Most of the tax accountants are so confident of their last year’s accurate tax filing that they do not think they need to keep up with the tax news anymore.
Every filer must realize that various minor or major amendments can be made every year by the IRS, and keeping compliance with the same is a necessity. There are also situations that need you to file an amended return post your tax filing submission due to the arrival of a new W-2/Schedule K-1/1099/ etc. form. Making the mistake of neglecting the tax change news is not at all a sensible practice.
6. Typographical Errors
Now, this is something that is more of a silly mistake that should be avoided and can be avoided easily through cross-verifying. Most of the people make the mistake of providing a wrong account number for a refund and keep waiting!
Another big mistake is the mismatch of your name with your social security number, restricting you to file the return unless a name change is reported by you.
7. Unorganized Records
Filing taxes require details of records, and when people do not organize their records properly, they are unable to recover important information from them. Also, most of the people get rid of essential records just to find out that they needed to include the same in the current tax return.
So, make sure you have a dedicated physical or electronic folder to store every record of yours, from minutest to the biggest.
8. Selecting the Wrong Deduction Type
While filing the tax return, filers have two deduction types to choose from: one is the standard deduction type, and the other is the itemized deduction type. It is essential to select the correct deduction type as per your filing status, and the deduction limit as only the right type will provide you with a bigger deduction.
9. Waiting till the Last Moment
Although there is nothing wrong with filing your tax return on the last day of the filing, this is pretty risky. The reason being, waiting till the last moment can make things appear to be overwhelming for you, which can lead to making errors and facing penalties eventually.
So, it is recommended to start filing your tax returns days before the tax filing deadline to avoid costly errors.
10. Overestimating Write-Offs
A lot of taxpayers assume that their write-offs can save them a huge amount of money while filing and paying the taxes. However, they do not realize that not every expense can be reimbursed. For instance, thinking that the expenses related to your own staff for outdoor activities can be reimbursed.
Legitimate write-offs are the ones that include the expenses related to your clients and those too that meet certain terms and conditions as provided by the IRS.
11. Underestimating Tax Credit
There are a lot of tax credits for which taxpayers are eligible for but most of them fail to realize the same. The reason being they depend a lot on the software and miss out on some considerable opportunities to lower their tax burden. There are various credits like The CARES Act, ACA Premium Tax Credit, and the Saver’s Credit.
For instance, under The CARES Act, a person who makes $99,001 is eligible to obtain $0 in tax credits, but a person who makes $98,999 (mere $2 less) is eligible to obtain $600 tax credit! So, this person, with a mere $2 deductible IRA contribution (prior to the deadline), becomes eligible for this tax credit.
12. Not Mentioning the Extra Income Earned
Irrespective of whether you received W-2/1099 form or not, every penny earned by you must be reported in your return, or you may face a penalty or even an audit. A majority of companies issue a 1099-MISC form against a payment of $600 or more to freelancers and independent contractors.
So, make sure you do not put your extra income aside in any type of 1099 form as the IRS also receives copies of such forms.
So, these are the common mistakes taxpayers commit while filing the tax returns. It is recommended to keep a copy of the tax return signed by you as proof against any type of late filing or no filing claim by the IRS. It is essential to become knowledgeable about everything related to taxes to ensure accurate tax return filing.
But, there exist multiple people who are not good at taxes owing to a lack of skills, time, and expertise. These people often commit one mistake or the other that finally results in penalties. In such a case, using top tax return preparation software or opting for tax preparation outsourcing services is recommended.
If you are searching for a leading tax preparation outsourcing leader, consider using Cogneesol’s unmatched and top-rated outsourcing accounting back-office services. It has been serving firms across the globe since 2008. Want to start a free trial? Get in touch now!
Meet the Contributors
- Kyle Eaton, CFP | Hedgefield Wealth Management
- Ed Canty, Financial Planner & Tax Advisor | Investing Simple
- Kenesha Coleman, owner | ColemanTax
- Shan-Nel Simmons, EA | Nel Tax and Financial Solutions (NTFS)
- Timo Wilson, CEO | Asap Credit
- Julia Brookes, Finance Consultant | Now Loans
- Alexa Serrano, Banking & Investments Editor | Finder
- Tatiana Tsoir is a CPA | Linza Business Academy Inc.
- Jack Choros, Accountant | CPI InflationCalculator
- Andrew Roderick, CEO | Credit Repair Companies
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