It is that time of year again! Your federal tax returns are due in a few weeks. In my line of work I frequently see incorrect returns or returns with questionable information. This blog post is a summary of common mistakes I see – usually created by tax preparers who lack knowledge of the tax laws, ethics or both. Remember, you are responsible for the information contained in your tax return, not the tax preparer. In the end you are signing it, so you need to review it carefully before filing the return (or letting someone else file it for you).
The below tips are not given as tax advice and are not specific to your personal facts. I am merely providing information in hopes that you will review your returns and ask your CPA or tax preparer the right questions. And if the tax preparer will not answer your questions or answers with a ‘that’s just how it is’ I would recommend finding a new CPA who can explain why your returns should or should not be completed a certain way.
Filing Status: This is listed right under the general information on a form 1040. If the errors start here, your tax return may have some serious issues. Generally, if you were married during the entire tax year and lived with your spouse for the entire tax year, you were married. A return for married people should not be marked as ‘Single.’
An ever more common error is when a married person who lived with their spouse for the entire tax year is marked as ‘Head of Household’ on their tax return. According to the IRS website you cannot file as Head of Household if you were married and lived with your spouse during the entire previous tax year(it gets more complicated if you got married or divorced during the previous year). The Head of Household distinction is for single-adult homes with children. More information can be found on the IRS’ website here.
Missing Income: When you earn income, the payor is usually obligated to send both you and the IRS a copy of a document such as a W-2 or 1099. If you forget to provide these documents to your tax preparer or your tax preparer fails to include income, the numbers on your return will not match the numbers the IRS has and you may be audited in the future.
People often think of money from their job as their only income, but did you know that the following items may be considered income for income tax purposes (these are just a few examples from a very long list):
- A forgiven debt
- Early retirement funds liquidation
- Money you received from a side business
- More information about income is available on the IRS’ website here.
Business Deductions: There are three important questions to ask about business expenses. First, do you have an actual business? This is a great discussion to have with your tax professional. Your tax professional may advise against taking $5,000 worth of business deductions against the $50 of health products you sold last year. Second, are there legitimate expenses related to your business? Again, a competent tax professional can go through your expenses one by one. You can deduct rent for your store, but probably do not get to deduct the entire monthly mortgage payment on your home. Finally, do those legitimate business expenses count as deductions? Just because your business paid for something does not mean that expense counts as a tax deduction. A commonly confused issue is when meals can be deducted. Meals can be deducted if they are eaten while traveling for business or if business is conducted/discussed during the meal. Bought your office staff lunch last week? This may not be deductible. Information on the IRS’s website can be found here.
Charitable Deductions: Ask yourself when reviewing the charitable deductions listed on your tax return – did I make that donation? If the answer is ‘no’ it may be time to hire a new tax professional. What types of charitable donations count as an IRS deduction is something you should ask your tax professional directly.
Unneeded Extensions: I sometimes have people tell me their tax preparer filed an extension for them. When I ask why, I rarely get an answer at all. When I do, the answer seems to be that the tax preparer was too busy and decided to punt your return down the road. Why file an extension if you do not need to? If your tax preparer recommends an extension I would ask ‘why?’ If their answer is because they are busy, maybe you should pay someone who has time to complete and file your return by the deadline.
Large Refunds: In a vacuum, receiving a large refund probably is not an issue. It may mean you are probably having too much money taken out of your paycheck (based on a form you completed for your employer called a W-4) and you are using the IRS like a savings account. While the feeling of ‘found’ money is a good one, this is not found money. The money you receive as a refund is money that belongs to you that the IRS has been withholding. And they are not going to pay you interest, either. If you find yourself contemplating bankruptcy, however, over withholding can create a slew of issues that need to be addressed before your case can be filed. Speak with your tax professional about whether adjusting your elections on form W-4 makes sense for you.
Failure to File vs. Failure to Pay: Sometimes people will put off filing their tax returns because they know they are going to owe. What folks do not take into account is that not filing is usually worse than filing – the penalties for an unfiled return are higher than the penalties for a filed but not paid return. Finally, a willful failure to file can be considered a criminal offense. While a ‘willful failure to file’ may mean something different in your case, why even mess around with possible criminal problems? Information on the criminal penalties can be viewed here. Here is an article explaining the financial differences in the penalties assessed by the IRS for the failure to file and the failure to pay. It may be outdated, but it will give you a general idea of differences between the two sets of penalties.
Hiring a Company You Saw on TV: While not every company that advertises on TV or the radio is a borderline scam, some are. When selecting a tax professional, I recommend reading my blog post about how to pick an attorney. Many of those principles apply to selecting a tax professional as well. Take time, do your homework and choose carefully. For example, one company that advertises frequently on the radio here in Houston mentions the ‘new’ Fresh Start program from the IRS. If you go to the IRS website, you’ll see that this program was announced in 2013. Do not believe that there is a new program or law change unless the company can provide written information about the law change and preferably a link that leads to an IRS press release or article.
I hope you have found the above thoughts helpful and will lead you to review your tax return more closely, ask your tax professional more questions and find a new tax professional if your current person cannot give good answers to your questions.
The information contained in this blog is for general information and educational purposes and is not legal or tax advice. Reading these posts does not create an attorney/client relationship.