The IRS has a list of red flags that tip them off if someone’s ripe for an audit. Making one or more of these common tax mistakes can lead to back taxes, fines and interest. According to the IRS, these errors can also make a taxpayer wait longer for a refund or lead to higher taxes.
The good news? The top 12 tax mistakes are all avoidable using tax preparation software like TurboTax, H&R Block Online and TaxACT which can eliminate the risk of making almost every one of them. That’s because tax prep software is automatic. It eliminates other errors by checking to make sure that each return is signed and dated, and by choosing the right forms to include based on the user’s unique financial situation. Tax prep software catches and corrects these twelve common errors before they get sent on to the IRS. This can greatly cut the chances of an audit and can also lower a user’s tax bill.
Consumers can avoid almost all the most common tax mistakes by using tax prep software like H&R Block Online.
Tax prep software asks a series of diagnostic questions that lead users smoothly through the tax filing process. The software does away with the potential confusion of sifting through reams of IRS forms, instructions, documents and other publications. Not only that, but the IRS says e-filing gets refunds to taxpayers in as little as 2 weeks. Compare that to 2 months with paper filing.
Read on to find out what the twelve most common mistakes according to the IRS are and how software can help avoid them.
Tax Mistake #1: Choosing the Wrong Filing Status
The IRS lists incorrect filing status as their #1 tax mistake.
Single? Married filing jointly? Married filing separately? Head of household? Qualifying widower? This may seem obvious, but according to the IRS, taxpayers often get this one wrong. People erroneously choose “head of household” without meeting the correct requirements. Choosing the wrong filing status can delay return processing and refund checks. It can also limit the available deductions. For example, selecting “married, filing separately” can prevent someone from claiming:
- Tuition and Fees Deductions
- Student Loan Interest Deductions
- Child and Dependent Care Credits
- Earned Income Credits
- Education Credits
Tax mistakes like choosing the “married filing separately” filing status can prevent taxpayers from claiming the Earned Income Credit.
Choosing “married, filing separately” can also tighten the limits on IRA contribution deductions. It forces both spouses to claim the standard deduction. It generally produces a higher tax bill than choosing “married, filing jointly.”
Tax prep software prevents filing status mistakes like this by asking clear questions. The questions guide the taxpayer to the filing status resulting in the lowest tax bill or the biggest refund. The software also ensures the user is eligible for the selected filing status.
Tax Mistake #2: Incorrect Social Security Numbers
Common tax mistake #2: Incorrect or missing social security numbers.
A big mistake with entering social security numbers on tax forms is transposing digits. For example, Kathleen’s social security number is 000-55-1234, (social security numbers starting in 000 aren’t real) but she’s tired when filling out her forms and accidentally enters 000-55-1243, swapping the position of the “3” and “4”. However, it’s also common to leave out the numbers entirely, forget to add the number of a spouse or a dependent child, or misspell names.
E-filing can catch common tax mistakes like incorrect or missing social security numbers a lot sooner.
Entering a social security number is an area where someone can still make a mistake even if they do use tax prep software. However, with e-filed returns, this problem is caught much sooner, with less potential for damage. That’s because IRS computers automatically check returns to see if names and social security numbers match. Since e-filed returns enter the IRS computer system instantaneously, their social security numbers are checked right away. Contrast that with weeks or months for paper returns, which require someone at the IRS to enter the information manually before the mistake is found.
Tax Mistake #3: Failure to Use the Right Forms and Schedules
Tax mistake #3: Failure to use the right forms and schedules. The IRS has over 2,000 forms, schedules, and publications.
The IRS publishes over 2,000 forms, schedules and sets of instructions. Understanding which ones are required for any individual’s specific financial situation can be difficult. It’s not hard for a form or two to slip through the cracks. Some examples of easy-to-overlook forms include form 8889 for health savings accounts, 6251 for the Alternative Minimum Tax, and 4562 for depreciation on business property. Tax prep software eliminates this problem by automatically attaching all required forms.
Tax Mistake #4: Failure to Sign and Date the Return
The IRS rejects returns that aren’t signed and dated. Tax prep software won’t submit unsigned, undated returns.
Tax Mistake #5: Claiming Dependents Illegally
The IRS defines a dependent as “a qualifying child or relative,” but under certain conditions a foreign exchange student living with a taxpayer may also be claimed. The dependent must be a US citizen or resident, they can’t be claimed as a dependent by anyone else, and they can’t be married, filing jointly.
There are many additional rules on qualifying children. It’s possible to read through all the rules and come up with the right answer, but doing so creates several opportunities to choose incorrectly. Again, tax prep software will ask the simple questions that will identify a child as either qualifying or non-qualifying.
Tax Mistake #6: Failure to File for the Earned Income Credit
Tax Mistakes #6 and 7 involve the Earned Income Credit. Click to expand.
Failing to file for the Earned Income Credit won’t get anyone audited, but it will make them miss out on refund money. The Earned Income Credit carries its own set of complex rules and restrictions. Many military families might not know they qualify for this credit, since combat pay and supplemental payments aren’t included in the income calculations for it. The full set of rules for Earned Income Credit eligibility is spread out over 3 different forms and publications. Again, tax prep software makes the choice an easy one.
Tax Mistake #7: Incorrectly Claiming the Earned Income Credit
A taxpayer might incorrectly think they qualify for the Earned Income Credit if their entire income comes from disability payments. Disability income doesn’t count toward EIC calculations. Likewise, each taxpayer’s unique financial situation must be checked against the EIC rules before applying for the credit. Improperly claiming the credit can mean delays and additional tax liability, not to mention fines and interest.
Tax Mistake #8: Failing to Report Domestic Payroll Taxes
People who employ domestic workers like in-home caregivers, nannies, and house cleaners are generally required to pay payroll taxes for them. Many people don’t submit these taxes. The result is fines, interest and additional tax liability.
Tax Mistake # 9: Failure to Report Income Not Included in a W-2, 1099 or Other Form
Taxpayers are required to report all income, whether it’s reported in a third-party statement or not. The IRS estimates that $270 billion goes unreported each year. The largest chunk of unreported income comes from small businesses. By law, all income must be reported. Tax software won’t help with this problem. Anyone hiding income faces penalties up to 75% and even jail time.
Tax Mistake #10: Designating Employees as “Independent Contractors” When They Aren’t
Some employers call their employees “independent contractors” to avoid paying payroll taxes. The IRS has a strict definition of independent contractors. Independent contractors are self-employed, and the way they work isn’t controlled by their employers. This is another mistake that comes down to knowing the rule and following it.
Tax Mistake #11: Failing to File a Return
The IRS applies heavy penalties to those who owe taxes but don’t file returns. On the flip side, someone who would have got a refund and doesn’t file is out of luck. After three years, the IRS doesn’t have to pay the refund.
Tax Mistake #12: Failure to Check Liability for the Alternative Minimum Tax
Tax Mistake #12: Failing to check liability for the Alternative Minimum Tax.
The Alternative Minimum Tax denies many of the usual deductions taxpayers use to reduce their tax bills. For instance, it blocks deductions for charitable contributions and mortgage interest. It also usually results in a higher tax bill. Every taxpayer is required by law to determine whether they’re liable to pay the AMT. They can do this by filling out the AMT Worksheet. If they’re subject to the tax, they also have to fill out form 6251. However, the worksheet, form and AMT instructions are long and complicated.
The IRS offers an Alternative Minimum Tax Assistant online to help. Here again, tax software can figure out AMT tax liability without making the user fill out complex forms.
In a Nutshell
With over 2,000 possible forms, schedules and publications, tax time can be a minefield. While tax preparation software can’t erase all twelve pitfalls on the IRS’s “Dirty Dozen” list, it can help with most. Tax software makes things easier by asking clear and simple questions to help users make correct decisions about things like filing status, whether to claim someone as a dependent, or whether to claim the Earned Income Credit.