Top 10 tax mistakes — and how to avoid them
The deadline for filing federal income tax returns for 2020 has been moved to May 17, giving individual taxpayers more time to file.
Take these extra weeks to look over your tax return carefully. The Internal Revenue Service has seen its fair share of tax slip-ups, which may cost you in the form of smaller tax refunds, a larger tax bill, or even a dreaded audit letter.
But the best defense is avoiding errors on your return in the first place. As the new filing date approaches, here are easy ways to avoid the biggest tax mistakes.
Filing a paper return
While filing a paper return isn’t a mistake, “if your return is delayed or lost in the mail, it could be a huge headache to deal with,” said Leslie Tayne, a debt resolution attorney and personal finance expert. “It’s better to file electronically because it takes significantly less processing time.” Plus, tax software can automatically check for tax breaks and apply the latest tax laws.
Forgetting to report all your income
The IRS expects you to report any income you received during the year, whether it’s reported on a W-2 or it’s cash you received under the table. “If you file your taxes and fail to include that income, you may face interest charges and a late filing penalty” when the IRS finds out, Tayne said.
Goofing up basic information
If you somehow misspell your name or leave a digit off your Social Security number, the IRS may reject your income tax return altogether. But the agency will tell you right away and let you make it right. Keep in mind: If someone in your household doesn’t have a Social Security number, you can list an Individual Tax Identification Number (ITIN) instead.
Not using the best filing status
Your filing status affects the tax rate applied to your income and certain tax breaks you can claim, so “choosing the wrong filing status can result in a lower tax refund, a bill for additional taxes, or even an audit,” Tayne said.
If you’re unsure which status to use — single, married filing jointly, married filing separately, head of household, or qualifying widow — then consider using tax-filing software or checking out the IRS’ Interactive Tax Assistant.
Answering the virtual currency question wrong
The 2020 version of Form 1040 asks whether you “received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency.” If you only purchased virtual currency in 2020, then you can answer “no.” But make sure your answer is correct. “Checking ‘no’ when you know the answer is ‘yes’ is an example of a willful tax violation,” Tayne said. A tax attorney or CPA can help if you have questions.
Providing the wrong bank information
You have the option of getting your tax refund sent to your bank account, but make sure the account number and routing number are correct. With the wrong information, the bank may reject the deposit — or, they may direct it to another person’s account.
Mailing your paper return to the wrong address
Some filers just prefer working with paper returns — but to avoid delays, you should double-check the correct mailing address. “Mailing your tax return to the wrong address could slow things down a bit, but it will be forwarded to the correct address,” Tayne said.
Forgetting to sign and date the return
It’s a small detail, so why not get it right? The IRS won’t accept a tax return that’s unsigned and not dated, which holds up the entire process. If you’re filing a joint return, make sure both spouses sign and date the return. E-filers can sign using a self-selected personal identification number (PIN).
Not making a copy of your return
Tax experts recommend keeping a copy of your tax returns for at least three years in case you get audited. After filing, make a copy of your return (or download it) and keep it in a safe place.
Needing more time
Need more time to file your tax return? No problem. File Form 4868 — by the filing deadline — to request an automatic six-month extension. This also prevents late-filing penalties. Just remember, you’ll still need to pay any taxes due by May 17 this year.
Read more information and tips in our Taxes section
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