Common Tax Preparation Errors: How to Avoid a Letter from the IRS

We’ve all received a few letters that have brought black clouds to our day.  Like the bill for the third of five payments for the Garden Growler, the revolutionary ground-hog repellant that seemed such a bargain a few months ago – the agricultural “miracle’ that burned up your yard and stank up your shed.

There are, however, envelopes that strike the heart with a lightning bolt of terror: the white, windowed, number ten envelope stamped with the return address: Internal Revenue Service Center.

If you receive one of these letters take a deep breath and draw some relief from the fact that the vast majority are simple notifications of an easily fixed error.  Others let you know of a minor discrepancy between your return and IRS records caused by something you forgot, didn’t consider relevant, or entered in the wrong place on your tax return.  Generally, these notices have little or no tax consequences.

Notices such as these are also easily avoided.  Here are a few examples of errors taxpayers commonly make on their personal returns.  Understanding these mistakes will help you avoid unwanted IRS correspondence and may even save you some money.

1. You forget to sign your return.  It’s surprising how many people who mail their returns forget to sign them. Before sealing the envelope, double check and make sure you (and your spouse) have signed and dated your return in the proper place.  A return is not considered filed unless it has the required signatures.  Mailing an unsigned return could open the door to additional penalties if you owe unpaid taxes.  This mistake is also easily avoided by filing your return electronically.

2. You forgot to include all income on your return.  Most businesses, banks, and investment companies are required to use Form 1099 to notify the IRS of the amount and type of income you earned during the year.  The IRS will compare the amounts reported on these 1099s against the income you report on your tax return and adjust your return if there is a discrepancy.  If you received a Form 1099 - and there are many types of 1099s - be sure this income is properly reported on your return or you may receive a notice from the IRS.  Also, if you change addresses during the year make sure your banks, investment companies, and business clients have your new address.

Worried that you may not be in compliance with form 1099-MISC? Check out our 1099-MISC Basics course to get all of your compliance questions answered.

3. You forgot to make estimated tax payments or forgot to report all the estimated tax payments actually made.  If you made estimated tax payments, double-check the amounts and the dates these taxes were paid. Forgetting to include a the April payment made last year, a payment applied from the previous year’s refund, or the January payment made for the previous tax year, are frequent errors.

A related error involves itemizing state taxes.  If you itemize deductions, estimated income taxes paid to states are deductible in the year paid, not the year to which they apply. For example, payments made to your state in January of 2010 for 2009 taxes should not be reported on 2009’s Schedule A.  This deduction will instead be reported on 2010’s return.

4. Filing your tax return late when you owe taxes. If you owe tax and file your return late, penalties on the unpaid balance are 5% per month, up to 25% of the tax due.  If you file more than 60 days late, the minimum penalty is $100. By comparison, the penalty for late payment of taxes due is .5% per month up to 25%.  If you are unable to pay your taxes and owe less than $25,000, include an installment agreement request (Form 9465) with your return.The IRS will generally accept your request if you owe no other taxes.

5. Entering a wrong social security number on your return. Transposing two numbers incorrectly is the most common form of this error.  Incorrect numbers will generate a notice and, possibly, the disallowance of a dependent’s exemption. Don’t file your return without verifying that all social security numbers have been entered correctly – even if you use a paid preparer.

Taking a few extra minutes to review your return will help you avoid these common errors, an effort that will be rewarded with peace of mind and an end to those heart-palpitating IRS notices.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.