When the IRS is reviewing your tax return, it doesn’t matter whether a filing mistake is intentional or inadvertent. Any error can trigger a notice, says Hayden Adams, CPA and director of tax planning at the Schwab Center for Financial Research.
While a mistake won’t necessarily lead to an audit, you want to avoid as many red flags as possible—particularly if you’re a high-income taxpayer, since they tend to be audited more frequently.
Understating income and overstating deductions are two potential problem areas for filers, Hayden warns. But those aren’t the only places where returns can go off the rails. Here are five frequent mistakes people make, and ways to prevent them.
1. Reporting income inaccurately
With few exceptions, any income you earn—whether from an employer, a side business or an investment—is reported to the government. The income you report needs to match what the IRS has on file.
How to prevent it: Keep track of your income throughout the year and make sure it matches your tax documents.
- Earnings. Your employer reports wages, salary and bonuses to the government on your Form W-2. Review your copy for accuracy.
- Retirement income. Withdrawals from tax-deferred retirement accounts like 401(k)s and Traditional IRAs are taxed as ordinary income. Depending on your income, a portion of your Social Security benefits could be taxable as well.
- Self-employment and investment income. These are reported on Forms 1099. If you receive a 1099 with an error, contact the source and ask for a corrected version.
If you’re self-employed and made at least $600 from a client, that client will report it to the IRS. But it’s up to you to report amounts under $600.
- Income from prizes or gambling winnings. You must report these.
2. Data entry errors and miscalculations
It’s surprisingly easy to transpose digits or read from the wrong line of a worksheet when you’re entering your information into tax preparation software. And if you’re still filing on paper, the chance that you’ll move a decimal, add incorrectly or make other computational mistakes goes up.
How to prevent it: “Always double check your return figures before filing,” Hayden says. Be especially careful when you work with tax credits and special deductions, or if you have to file a more complicated tax return that includes worksheets, tables or additional forms.
If you’re really worried about making a mistake, your best option is to ditch the paper forms and use tax preparation software, or pay a tax professional to do the work for you. It may sound obvious, but always check your numbers.
Math mistakes caught by the IRS in 2017: 2.5 Million
Source: IRS 2017 Data Book
3. Misreporting investment income
If you don’t know the correct cost basis of your investments, you could misreport investment gains or losses.
How to prevent it: “Check your return to see if it matches the information on the 1099 provided by your broker and make sure the cost-basis information reconciles to your brokerage statements,” Hayden says.
Cost basis is reported for most securities bought since 2011, but if you’ve been holding onto a stock for decades, the IRS won’t have the cost basis on file. Also, be sure to account for any subsequent stock splits, spin-offs or mutual fund distributions that might have been automatically reinvested along the way.
If there is a discrepancy between your records and your broker’s, fix it with your broker before you file. Make sure you have records to substantiate your cost basis, in case you get audited down the road, Hayden says.
Wash sale rule violations will also show up on your brokerage record. You could lose or postpone the tax benefits of a trading loss if you have purchased a “substantially identical” security 30 days before or after the sale.
4. Excessive or unusual deductions
Certain deductions can be a red flag for the IRS—especially for self-employed taxpayers who itemize and for individuals with large charitable contributions relative to their income.
How to prevent it: Deductions can be tricky for self-employed filers because sometimes the line between business and personal expenses can feel blurry, particularly around home offices, meals, transportation, and phone use.
If you’re ever in doubt, check the IRS guidelines for business deductions—they’re pretty clear. Follow them and keep thorough records, and check with a professional if you’re still not sure, Hayden says.
When it comes to charitable contributions, check the charity’s tax-exempt status first, and be sure you obtain a proper receipt. Be aware that the tax deduction for the donation of personal goods applies only to items that are in good condition. Deduct only the current fair market value, not the amount you paid for the item.
5. Erroneous personal information
Sometimes it’s the simplest things that trip you up: forgetting to sign your return, for example, or entering an incorrect Social Security number.
How to prevent it: Use this checklist to review a few key items.
- Your name. Maybe your name is frequently misspelled. Maybe you changed your name in the past year. Whatever the reason, it’s important to make sure your name is correct here.
- Your address, particularly if you’ve moved recently.
- Your Social Security number and the Social Security numbers for all your dependents.
- Your filing status, in case your marital or filing status has changed.
- Your signature, to make sure it’s there.
What you can do next
With tax season starting, it’s time to gather and review all your tax documents so that you can avoid these common tax-filing errors, and reduce your chance of landing on the IRS’s radar for an audit.