Tax Filing Mistakes

by Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

Tax return anxiety is on the rise as the federal tax filing date looms. The prospect of filing an erroneous return increases as more rely on tax software to help prepare their returns. For the week ending March 28, more than 10,000 electronic returns were filed from home computers, an increase of at least 10% from the previous year. Within the same week calls to the IRS increased dramatically as well- the IRS fielded close to a million and a half calls per day. To allay some of the fears, the Internal Revenue Service produces yearly advice on how to avoid common tax filing mistakes. Reproduced below are the top ten common errors we have frequently seen among self-prepared returns.i

1. Choosing the wrong filing status. Taxpayers should confirm that the filing status (i.e., single, married filing jointly, married filing separately, head of household, qualifying widow(er) with dependent child) selected on the return is correct. For example, taxpayers often incorrectly claim “head of household” filing status without meeting the requirements for that status. In addition to delaying the processing of the return and any refund, designating the wrong filing status on a return also may affect a taxpayer’s eligibility for the Earned Income Credit. The Instructions to the 2007 Form 1040 provide detailed information to assist taxpayers in choosing their correct filing status.

2. Failing to include or using incorrect social security numbers. The names and social security numbers for the taxpayer, taxpayer’s spouse, dependents, and qualifying children for the Earned Income Credit or Child Tax Credit must be included on the return exactly as they appear on the social security cards.

3. Failing to use the correct forms and schedules. Taxpayers should review the instructions to all applicable forms and schedules to be sure they have correctly used, and accurately completed, each form or schedule.

4. Failing to sign and date the return. Taxpayers must sign and date their return under penalties of perjury. If the return is not signed, it will not be accepted as filed by the Service. Both spouses must sign a joint return.

5. Claiming ineligible dependents. Taxpayers may claim a person as a dependent only if that person meets the legal definition of a dependent. Taxpayers should consult the Instructions to Form 1040 or 1040-A to confirm that a person qualifies as a dependent. Each dependent must have a valid Social Security number (or other Taxpayer Identification Number, as applicable), which must be included on the tax return. The failure to include a dependent’s name and Social Security number, or claiming an ineligible dependent, may result in an underpayment of tax and/or a denial of the Earned Income Credit.

6. Failing to pay and report domestic payroll taxes. Taxpayers employing household workers, such as a house cleaner, an in-home caregiver, or a nanny, must report and pay payroll taxes for those individuals when the payments exceed certain threshold amounts. Failure to pay and report payroll taxes may result in the assessment of additional tax due, interest on the unpaid amounts, and penalties. The Instructions to the Form 1040, Publication 926 (Household Employer’s Tax Guide), and Publication 15-A (Employer’s Supplemental Tax Guide) contain detailed information to assist taxpayers in determining whether an individual providing household help is a household employee for whom the taxpayer must report and pay payroll taxes.

7. Failing to report income because it was not included on a Form W-2, Form 1099 or other information return. Taxpayers must include on their tax returns income reported on a third-party information reporting statement such as a Form W-2 or Form 1099, or another similar statement. But even if income was not reported on a third-party reporting statement, taxpayers must still report all income. Failure to report all income may result in the assessment of additional tax due, interest on the unpaid amounts, and penalties.

8. Treating employees as independent contractors. Employers may not treat an employee as an “independent contractor” to avoid paying and reporting payroll taxes. Employers who improperly treat an employee as an independent contractor may be liable for additional tax due, interest on the unpaid amounts, and penalties. Publication 15-A (Employer’s Supplemental Tax Guide) contains detailed information to assist taxpayers in determining whether an individual is an employee or an independent contractor.

9. Failing to file a return when due to a refund. Taxpayers must file a return to claim a refund of withheld taxes when a refund is due. Taxpayers will forfeit refunds of withheld tax if a return requesting a refund is not filed within three years of the due date.

10. Failing to check liability for the alternative minimum tax. Taxpayers should determine whether the alternative minimum tax, or AMT, applies. If a taxpayer is liable for AMT but does not include it on the return, the Service will determine the taxpayer’s liability and may reduce or deny a requested refund or assess any additional tax due, interest on the unpaid amounts, and penalties.

i(2007, 04 09). Common Mistakes on Tax Returns. Retrieved March 25, 2008, from Internal Revenue Bulletin – April 9, 2007 – Notice 2007-35 Web site: http://www.irs.gov/irb/2007-15_IRB/ar09.html