Avoiding Common Tax Errors

In this topic, you'll learn:

• Understanding the most common tax return errors.
• How to fix errors by amending your tax return.
• What to do if your mistake leads to a tax bill you can't afford.

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Given the tax code's complexity, it is not uncommon to make mistakes when filing taxes, especially if you are filing for the first time or have a unique tax situation. Unfortunately, tax return errors can result in penalties and interest charges, which can quickly add up.

Here are some common tax errors:

• Failing to report all income - This often occurs if you have multiple sources of income, such as a full-time job, a side gig, or investment income. To avoid this mistake, ensure you have all your tax forms, including W-2s, 1099s, and K-1s. If you are still determining whether a source of income should be reported, consult a tax professional.

• Forgetting to claim deductions and credits - Deductions and credits can help reduce tax liability, but many taxpayers fail to claim them. For example, you may claim the standard deduction when itemizing deductions would have resulted in savings. Credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and Education Credits. Consider using tax preparation software or consulting with a tax professional to ensure you get all deductions and credits.

• Filing with incorrect personal information - It's important to double-check your personal information before filing your tax return. Make sure your name, Social Security number, and address are correct. If any of this information needs to be corrected, it could delay your refund or cause other problems. 

• Choosing the wrong filing status - Your filing status determines your tax rate, standard deduction, and eligibility for certain credits and deductions. Selecting the wrong filing status can result in an incorrect tax liability. If you are unsure which filing status to choose, consult a tax professional.

• Making math errors - Math errors are another common mistake on tax returns. These can be as simple as adding or subtracting incorrectly or more complex, such as misapplying a tax rate. To avoid math errors, double-check your calculations or use tax preparation software, which can automatically perform calculations for you.

• Failing to sign and date your tax return - Finally, failing to sign and date your tax return can result in it being rejected or delayed. If you're filing electronically, you must use a personal identification number (PIN) to sign your return. If you're filing a paper return, sign and date it before mailing it in.

You'll often learn about errors by receiving a letter from the IRS. However, in other cases, such as not claiming all eligible deductions, you must contact them to correct the error. 

How to Fix Mistakes on Your Taxes

To fix mistakes on your taxes, determine the nature of the mistake. The IRS will typically correct minor math errors, and you will receive a corrected notice and, if necessary, a refund or demand for additional tax payment. 

For more significant mistakes, such as incorrect personal information or missing forms or schedules, you should file an amended tax return using form 1040X, which requires you to explain the changes you're making and provide any necessary documentation.

You must file an amended tax return within three years of the original filing date or within two years of the date you paid the tax, whichever is later.

When filing an amended tax return, provide all necessary documentation and explain your changes in detail. Once you've filed the amended return, it can take several weeks or months for the IRS to process it. You can check the status of your amended return using the IRS's "Where's My Amended Return" tool.

It's worth noting that mistakes on your tax return can result in penalties or interest. If you owe additional tax, you may be subject to penalties and interest if you fail to pay the tax by the deadline. However, filing an amended return and paying any additional tax owed can minimize these penalties and interest.

Can't Afford Your Taxes? There Are Options

Suppose a mistake on your taxes results in a bill you cannot pay. In that case, you can take steps to address the issue and minimize potential penalties and interest. 

First, it's essential to pay attention to the problem. Failing to pay your taxes can result in penalties and interest that can worsen a bad situation. In addition, the IRS can take collection action against you, such as placing a lien on your property or garnishing your wages. So it's essential to address the issue as soon as possible.

• Step 1: File Your Tax Return - Even if you can't afford to pay your taxes, filing your tax return on time is important. Failing to file your return can result in even more severe penalties than failing to pay your taxes. By filing your return, you can avoid these penalties and show the IRS that you take the issue seriously.

• Step 2: Consider an Installment Agreement - One option for dealing with unpaid income taxes is to enter an installment agreement with the IRS. An installment agreement allows you to pay your taxes over time in monthly installments. To apply for an installment agreement, you must fill out form 9465, available on the IRS website. If you owe less than $50,000, you can usually apply online.

• Step 3: Request an Offer in Compromise - In some cases, the IRS may be willing to accept less than the total amount of taxes owed through an Offer in Compromise (OIC). An OIC lets you settle your tax debt for less than the full amount owed. To apply for an OIC, you can complete the Offer In Compromise Pre-Qualifier form on the IRS website. It's important to note that only some are eligible for an OIC, and the process can be lengthy and complicated.

The Takeaway

Dealing with tax errors and unpaid income taxes can be complicated. If you're unsure about your options or need help navigating the process, consider seeking professional help. A tax professional or attorney can provide guidance and help you develop a strategy for addressing the issue.