Picture this: You spent hours calculating your income and expenses, filling out necessary paperwork, and then you finally finished your tax return. Off it goes to the IRS, then a notice turns up in your mailbox a few weeks later, telling you that you did something wrong.
Take heart. A mistake won’t result in a full-fledged audit in most cases, although it can hold up your refund until things get straightened out. That notice can signal trouble, however, if you claimed tax deductions or tax credits that you weren't actually eligible to claim.
As unpleasant as preparing your tax return can be, you’re invariably better off taking the time to avoid mistakes. This coming tax year, check your return against this list of common errors before you send it off to the IRS.
Keep Up With the News
Keeping on top of changes to tax law is particularly important as you prepare to file your tax return.
It's important to know which tax return you are going to file. Will it be Form 1040, 1040A, or 1040EZ? You won't get very far if you selected Form 1040A or 1040EZ because they're obsolete. The IRS issued a significantly revised Form 1040 for the 2018 tax year, then it made further tweaks in 2019, 2020, and so on.
The IRS makes changes to tax law and regulation on an annual bases. For tax year 2021, for example, the IRS made annual inflation adjustments for more than 60 tax provisions, including tax rate schedules. These changes are relevant to the return you will file in 2022.
Which form to use won't be a problem if you use tax preparation software—all the software providers are well aware of this wrinkle and they've adapted their programs accordingly. They're also up to date on the many, many provisions introduced to the tax code in 2018 subsequent to the passage of the Tax Cuts and Jobs Act (TCJA).
One news-related change to the tax process stemmed from the coronavirus pandemic in 2020. The American Rescue Plan Act (ARPA) was signed into law in March 2021, providing numerous temporary and advantageous adjustments to the tax code for tax year 2020, the return you'd file in 2021. They included changes to:
- The Earned Income Tax Credit
- The Child Tax Credit
- The Child and Dependent Care Credit
- The Premium Tax Credit
It also provided that unemployment compensation was not taxable in 2020 as it normally is, up to $10,200 in benefits for many taxpayers.
The bottom line: Read up on all relevant changes ahead of time so you know what you can claim come tax filing season.
Know Your Filing Status
You’re faced with choosing your filing status right off the bat when you begin preparing your tax return, and there are some intricate differences between them. The rules for qualifying can make all the difference between being able to file as head of household, a particularly advantageous filing status, or having more of your income taxed as a single taxpayer.
You must have a dependent to qualify as head of household, and you must pay for more than 50% of your household’s expenses. You can’t be married—or, at least, you can’t have lived with your spouse at any point during the last six months of the year.
Read up on the rules for dependents and filing statuses before you make a selection. You might be safe if you have a child, but you could run into problems if you try to convince the IRS that your girlfriend is your dependent, for example.
Get the Data Right
Math errors are the most frequent problem with tax returns, but sometimes data is erroneously entered even before you begin subtracting, adding, and dividing.
Use the exact numbers that appear on your W-2, 1099, or other tax forms. Don’t round them up or down. The IRS will compare your tax return to the copies it receives of these forms. A red flag will begin waving even if you claim $41,650 in income rather than $41,652, for example. Take care not to transpose numbers, because problems will also arise if you enter $41,562 instead.
Make sure you get Social Security numbers right, as well—yours, your spouse’s if you’re married, and those of your dependents. It will bog down processing of your return by the IRS if what you enter doesn’t match Social Security Administration records. This includes using the exact name that appears on each individual’s Social Security card, as well.
Lastly, be sure to enter a Social Security number for your infant, if you have. You can’t claim an infant as a dependent without one.
Avoid the Chance of Not Getting a Refund
While we're on the subject of numbers, don't forget to check (and double-check) your bank account information if you're asking the IRS to direct deposit your refund.
In most cases, you'll enter your bank information at the bottom of Form 1040. However, you must file IRS Form 8888 with your tax return if you want to direct your refund into up to three accounts. It's really a very simple form, but because there are many forms, there are three opportunities to get the numbers wrong, and a surprising number of people do just that.
You have to enter your banks' routing numbers and your account numbers on the form. Consider reading them aloud to your spouse or a trusted friend after you've entered them on the form to make sure they're exactly right—they can confirm them against what's printed on your checks or account statements.
What if you make a mistake anyway? Unfortunately, the answer is that you could lose your refund. The best-case scenario is that your bank doesn't have an account with the erroneous number you entered, so it will just send your money back to the IRS. It might mean a big delay, but eventually you'll get your money.
Otherwise, if your refund is deposited into someone else's account, you could find yourself depending on a stranger's honesty. They might take the money and run with it rather than notify the banking institution that there's been a mistake ... and the IRS will not issue you a new refund when this happens. You can file Form 3911 with the IRS and they'll contact the bank on your behalf, but they can't compel the bank to cooperate if they refuse.
Include All Income You Earned
Virtually all your income is taxable, every dime. It doesn’t matter if you didn’t receive a W-2 or 1099 form for the money—you have to report it regardless. This can come as a surprise to some taxpayers who picked up a little extra cash over the year in addition to paychecks from their regular jobs. Yes, you're supposed to report it, even if someone just gave you $50 in cash or a $75 bottle of wine for fixing their glitchy computer.
Most companies will issue you a 1099-NEC form if they pay you $600 or more as an independent contractor or freelancer, but don’t rely on this. It's important to keep good records throughout the year so you know exactly how much to claim come April’s tax deadline. And again, you still have to report the income even if someone paid you less than $600.
If you receive any type of 1099 form, know that the information it includes must go on your return somewhere. Ask a tax professional if you’re not sure where to enter it.
This issue can be particularly confusing with investment income, and it's a classic mistake with returns. Don’t set the form aside and risk forgetting about it because you’re unsure what to do with it. The IRS receives copies of these forms, too.
Decide To Itemize or Not To Itemize
Claiming deductions and/or tax credits is an area that just begs taxpayers to make mistakes. Eligibility for certain credits can be quite complicated, and multiple rules apply to many tax deductions as well.
You must itemize to claim some deductions, and itemizing means not claiming the standard deduction for your filing status. This can actually result in paying the IRS more than you have to.
Let's say you made a donation to the American Red Cross and choose to itemize. If your total itemized deductions add up to $5,000 and you’re eligible for a $12,550 standard deduction as a single taxpayer when you file your 2021 return in 2022, you’d end up paying taxes on more in income than you had to—the difference between all your itemized deductions and the standard deduction you're entitled to claim instead.
You’ll need specific proof of the deductions you claim even if the math works out in your favor, particularly charitable contributions. Take time to research the rules for this, or ask a tax professional.
Calculate Eligibility for Tax Credits
As great as tax deductions can be, tax credits are considered even better. Deductions come off your income, whereas tax credits subtract from your tax liability—what you’ve realized you owe the IRS when you get to end of your tax return.
Let’s say you owe the IRS $5,000, but you qualify for a $1,500 tax credit. Now you only owe the IRS $3,500 because the credit is deducted directly from what you owe. Or maybe you only owe the IRS $1,000 but you’re eligible for a $1,500 tax credit. The IRS will send you a refund for the $500 balance if the credit is refundable (although most aren't) but it will keep the difference if the credit is nonrefundable.
The IRS doesn’t want to send you a tax credit refund without first making very sure that you meet all the rules for qualifying. In fact, one of the provisions included in the Protecting Americans from Tax Hikes (PATH) Act of 2015 requires that the IRS take a little extra time to review all claims for these two refundable credits to make sure the taxpayers really are eligible.
Calculations for qualifying and how much of a credit you can claim can be complex, and it’s easy to make a mistake. Be sure to take advantage of the calculators provided by the IRS to make sure you qualify and, if so, for how much. Better yet, touch base with a tax professional or at least use quality tax preparation software. These programs will determine your eligibility based on your responses to some questions.
Many credits also typically require that you complete extra tax forms and attach them to your tax return in a certain order. If you have any doubt at all that you’re making the calculations correctly or that you’re correctly attaching what must be attached, seek help from a tax professional.
Consider Using Tax Software
According to the IRS, you’re more likely to goof on your tax return if you try to do it on paper. Who needs that pressure? Increase your odds of filing a trouble-free return by using tax software or IRS e-file.
These programs walk you through tax preparation by asking you questions and applying your answers to determine what credits and deductions you qualify for. They’ll tell you if you’re better off itemizing or claiming the standard deduction. Best of all, these programs do the math for you, and some even guarantee that they'll pay any financial penalties on your behalf if they make a mistake.
Don't Be Late
Maybe you're a procrastinator by nature, or maybe you just hate preparing your taxes so much that you put it off. Next thing you know, it's April 1, April 10, or even April 15, and you haven't even started your return yet.
If you know that you will be delayed in filing your return, fill out and file Form 4868 by April 15. The form gives you an extra six months, until Oct. 15, to file your return.
If you choose to submit an extension request, be aware that you're supposed to remit any tax you might owe at the time you submit it. This can be a shot in the dark if you haven't yet completed your tax return, but you'll find estimating calculators all over the internet to help you along.
The important thing is that you send in some payment. If it ends up that you owe more—or if you make no payment at all—you'll probably be hit with interest and penalties on the outstanding amount after April 15. And if you estimate too much, the IRS will send you a refund.
Sign on the Dotted Line
This isn't so much a problem with e-filed returns, but it's surprisingly common with old-fashioned, pen-and-paper tax returns for taxpayers to forget to sign on the dotted line. A signature is needed to ensure you file your taxes properly.
Keep in mind that you don't just have to sign your Form 1040. If you ended up having to submit other schedules and forms with your return, many of these must be signed, too. You won't be audited if you forget—at least not if this is the only problem with your return—but the IRS won't process your return, either. You'll get one of those heart-stopping envelopes in the mail with an IRS return address.
It's a simple fix, but check all your signature lines to spare yourself the aggravation. And make sure you date your return, too.
Consider enlisting the help of a tax professional to complete your tax return if your financial situation is particularly complex. With expert help, the chances of making a mistake will drop exponentially.