Common tax return filing mistakes: 9 things to avoid
With the Federal Internal Revenue Code and Federal Tax Regulations totaling over 10 million words, it's an understatement to say that taxes can be confusing. Although understanding tax law is difficult, many of the mistakes taxpayers make on their returns are simple. These simple mistakes end up costing filers. Mistakes cost money in penalties, added time as the IRS asks them to amend their return, and added stress as the possibility of an audit looms.
The most common setback caused by a math mistake is a tax refund delay. In 2022, the average refund amount was $3,012. As a taxpayer, you have every right to want your refund sooner rather than later. To make that happen (and avoid penalties), do your best to avoid making these mistakes on your tax return.
#1 - Math errors
It’s easy to miss a number, add an extra digit, or input an incorrect number. According to the IRS, math errors are the most common mistakes tax filers make. Double-check your math or use tax preparation software that does the math for you.
Many taxpayers want to know if a math error will trigger an audit. While a math error won’t automatically trigger an audit, it certainly increases your chances. The IRS understands that people make unintentional errors, but estimating or rounding up numbers is a big no-no.
Know that the IRS audited 3.8 out of every 1,000 returns, or 0.38%, during the fiscal year 2022. Does this mean that you shouldn’t due your due diligence when filing your return? No. What it does mean is the likely consequence of a math error is the IRS sending you notice in the mail proposing an adjustment.
#2 - Choosing the wrong filing status
The mistakes taxpayers make on their tax returns aren’t just simple errors of addition and subtraction. Simply making the wrong choices in your tax return can cost you money. Your filing status determines your filing requirements, standard deduction, eligibility for certain credits, and your correct tax. The five filing statuses are single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child.
If you’re unmarried, you can still qualify as a head of household and pay significantly lower taxes. Usually, married couples should file their taxes jointly to take advantage of the higher standard deduction and other benefits. However, there are rare cases when filing separately may be the better option.
If you need help, you can use the Interactive Tax Assistant on IRS.gov to help you choose the correct status. A qualified CPA can also help you choose the right status.
#3 - Entering incorrect information
If you use automatic tax filing software, it can be easy to enter the wrong information. Always double-check what you type and compare it to the information reported on your W-2, 1099, and/or K-1.
- SSN: Your SSN should appear exactly as printed on your Social Security card in the XXX-XX-XXXX format.
- Bank Account Numbers: If you choose direct deposit because you want your refund as the fastest way possible, make sure you enter the correct banking info.
- Names: The name listed on your tax return should match the name on your Social Security card. This includes a middle initial if you use one.
- Wages: Under or misreporting wages as stated on your W-s, 1099, K-1, and other documents can result in a penalty. The rate of penalty for under-reporting is 50% of the tax payable. The rate of penalty for misreporting of income is 200% of the tax payable.
- Dividends: All dividends paid to shareholders must be reported in their income.
- Bank Interest: You must report all taxable and tax-exempt interest on your federal income tax return, even if you don't receive a Form 1099-INT or Form 1099-OID. Unlike self-employed income, which has a minimum before you’re required to report it, you are still required to report any interest earned and credited to your account during the year.
#4 - Miscalculating Credits And Deductions
Deductions reduce the amount of income you pay tax on. Tax credits reduce the amount of tax you owe. Taxpayers often make any of these three mistakes when filing their tax returns: miscalculating credits and deductions, claiming false deductions, and leaving money on the table by not claiming qualifying deductions/credits.
A few common mistakes filers make in all three cases:
- Taxpayers over the age of 65 or older, or blind should claim the Additional Standard Deduction if they’re not itemizing.
- Student Loan Interest Deductions are only available to taxpayers who earn below a certain threshold (less than $70,000 for single filers). If your income falls above this threshold, you can’t subtract the interest you paid on student loans.
- The Home Office Deduction is a real legitimate deduction. Many filers shy away from taking this deduction because they incorrectly believe it’s an audit trigger.
- The Earned Income Tax Credit is available to low and moderate-income taxpayers who earned less than $59,187 in 2022 and met other criteria. The most common mistake filers make is claiming a child that doesn’t meet the residency, age, or relationship requirements.
- Many business owners disqualify themselves from the Employee Retention Tax Credit because the rules confuse them. The rules have changed many times since it was introduced. Instead of walking away from money, consult a tax professional.
Not to sound like a broken record, but the Interactive Tax Assistant can help determine what credits and deductions you may qualify for. Always be prepared to back deductions up with proof (documentation, pay stubs, receipts, etc.) even when you know you’re qualified. The IRS generally targets returns with deductions that exceed $5,000.
The general complexity around deductions can lead filers to take the standard deduction. This leads us nicely to our next common tax return filing mistake.
#4 - Automatically taking the standard deduction
In 2015, 45 million taxpayers itemized their deductions. In 2018, that number dropped to just 15.5 million taxpayers. That is almost 30 million taxpayers who may leave money on the table by not itemizing their deductions. The main reason for this sharp fall is because of the Tax Cuts and Jobs Act, which nearly doubled the standard deduction. This made it less likely for you to save money by itemizing your deductions, but it still doesn’t hurt to do so.
For 2022, the standard deduction is $13,850 for single and married filing separate taxpayers, $20,800 for heads of households, and $27,700 for married filing jointly taxpayers and surviving spouses.
Reducing your adjusted gross income by up to $27,700 isn’t the only benefit of the standard deduction. Also, there’s no need to itemize deductions; it lets you avoid keeping records and receipts.
Situations where you may want to itemize your deductions:
- You had large out-of-pocket medical or dental expenses
- You made large contributions to qualified charities
- You lost a significant amount of uninsured property to theft, fire, flood, or wind
- You lost money or investments in a Ponzi scheme
- You wish to deduct the maximum of $750,000 in mortgage interest
- Other miscellaneous deductions
#6 - Unsigned forms
The IRS states clearly that unsigned and undated forms are not valid. This includes joint filings requiring two signatures. If you forget to sign your return, the IRS will send you a letter requesting your signature. Once they receive your signature, they’ll go ahead and sign your return.
#7 - Missing information and paperwork
Missing information is a common mistake that taxpayers make. Also, it’s common for taxpayers to fill out information in an unintended field, leaving the intended field blank. To fix a return that is missing information, the IRS will ask you to file an amended return using Form 1040-X.
#8 - Filing too early
We’ll tread lightly with this advice because we’d never recommend procrastinating on starting your tax return. Understand the nuance that filing your return late is a mistake for many reasons. Still, for some filers, filing before you receive all your tax information is a bad idea. Companies aren’t obligated to distribute W-2s and K-1s until January 31st. That’s 18 days after the official start of tax filing season 2023.
Here’s the bottom line.
If you’re waiting on important documents like income from other sources, don’t file your taxes until you receive them. The last thing you want to do is underreport your income because you thought you knew instead of knowing for certain.
#9 - You don’t tell the IRS what to do with your refund
The last tax return filing mistake is probably infuriating. You get everything right but forget to add your bank account information (account and routing number). If you don’t do this, the IRS will still send you a tax refund, but it’ll be through snail mail.
Bonus Tip: You can actually split your refund between up to three accounts or use it toward next year’s estimated taxes.
Prepare early and get it right with ComplYant
It’s that time of year again. You’re gathering all of your forms and paperwork so you make sure you get everything right. Remember, tools like the Interactive Tax Assistant can assist you in filing an accurate tax return. If you still make a minor mistake in good faith, you will most likely just receive a letter from the IRS requesting you amend your return.