It happens every year: taxpayers in a hurry to complete their returns make mistakes or omit certain items. Then the IRS catches up to the error of their ways and imposes additional tax, penalties or interest – or all three.
Don’t commit the types of blunders that often plagued taxpayers who have rushed in the past. Take the time to do things right the first time.
What sort of mistakes are we talking about? The list of possible foul ups is a long one, but these seven mistakes often show up on returns.
- You don’t report all your income. If your company issues you a W-2, you just report the wages on your return, but things are more complicated for self-employeds or those with sideline businesses. Typically, you’re inundated with 1099s from a wide variety of sources, and it’s easy to miss or forget one.
- You enter the wrong name or Social Security number. Getting names and numbers wrong is one of the most common mistakes year in and year out. The IRS verifies names and Social Security numbers when it possesses returns. If the numbers don’t match up, the return is flagged and could be rejected. Likewise, use your legal name and not a nickname or shorthand version.
- You enter the wrong numbers for financial accounts. This can cause problems if you’re listing investment income from a brokerage or interest from a bank. In the worst-case scenario, you could be penalized if a payment is late because one or two routing numbers are off.
- You don’t contribute to an IRA. Although you can sock away more money in other types of plans, like 401 (k)s and Simplified Employee Pensions (SEPs), IRAs still offer valuable tax-saving benefits. The contribution limit for the 2020 tax year is $6,000, plus you can add $1,000 more if you were age 50 or older at the end of the 2020. Contributions to a traditional IRA may be wholly or partially deductible, depending on your income, but Roth IRAs offer future tax-free benefits. The deadline for 2020 IRA contributions is April 15, 2021 – no extension allowed.
- You “overpay” to have your return filed. We’re not saying that you should not use a tax professional to prepare your return when it is warranted. But if the return is relatively simple, filing with one of the widely available software packages is easy and cheaper.
- You don’t e-file your return. You can avoid some potential errors – such as sending your return to the wrong location – if you file electronically instead of submitting a paper return. This is the fastest, most accurate and most secure method of filing. Plus, the IRS typically processes e-filed returns within 48 hours, so you’ll receive any refund sooner.
- You wait too long to file. Last, but not least, if you have to rush through your return, you’re more likely to make mistakes, even if you e-file. Don’t procrastinate. Not only can you cross this task off your to-do list, filing early may give you peace of mind. Whether you will be filing your own return or using a paid preparer, get all your ducks in a row now. You may need to request information from your employer or financial institution if you don’t have all the documents you need. If needed, simply request an automatic six-month filing extension to October 15. Note: This is not an extension to pay tax.
Small Business Tax Strategies