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Four Common Tax-Filing Mistakes and How to Avoid Them

During my eight-year tenure at the IRS, I watched taxpayers make the same mistakes time and again. Not all errors will lead to an audit, but taxpayers should take pains to be as accurate as possible—and to avoid the following oversights that can lead to heightened IRS scrutiny.

Red Flag #1: Underreporting income

Generally speaking, all income is taxable unless it’s specifically excluded, as is the case with certain gifts and inheritances. In most instances, the income you earn will be reported to both you and the government on an information return, such as a Form 1099 or W-2. If the income you report doesn’t match the IRS’s records, you could face problems down the road—so be sure you include the income from all of the following forms that are applicable to your situation:

  • 1099-B: The form on which financial institutions report capital gains.

  • 1099-DIV: The form on which financial institutions report dividends.

  • 1099-MISC: The form used to report various types of income such as royalties, rents, payments to independent contractors and numerous other types of income.

  • 1099-R: The form on which financial institutions report withdrawals from tax-advantaged retirement accounts.

  • Form 1099-INT: The form on which financial institutions report interest income.

  • Form SSA-1099: The form on which the Social Security Administration reports Social Security benefits (a portion of which may be taxable, depending on your level of income).

  • Form W-2: The form on which employers report total annual compensation, payroll taxes, contributions to retirement accounts and other information.

If you receive an inaccurate statement of income, immediately contact the responsible party and ask that it correct and resend the documents to both you and the IRS as soon as possible, lest your tax return be held up. Be aware, too, that income for which there is no form, such as renting out your vacation home, must also be reported.

Red Flag #2: Misreporting investment gains

When you sell an investment, you’ll need to know both the cost basis—that is, what you paid for the investment—and the sale price in order to determine your net gain or loss. The cost basis of your investment may need to be adjusted to account for commissions, fees, stock splits or other events, which could help reduce your taxable gain or increase your net loss.

Financial institutions are required to adjust your investments’ cost bases and present them on a Form 1099. However, brokerages aren’t required to report the cost bases for investments purchased prior to a certain date, which means you’ll be responsible for supplying that information (see “All you,” below). Be sure to keep records of all investment purchases and sales—even those for which your brokerage is responsible.

Red Flag #3: Claiming unsupported deductions

The IRS keeps a careful eye on deductions—especially charitable gifts—in order to discourage abuse, so keep meticulous records, particularly if the deduction is especially large or unusual. Be sure, too, to verify that any organization to which you donate is recognized by the government as a tax-exempt entity. You can use the IRS’s Exempt Organizations Select Check tool to confirm an organization’s tax status.

Red Flag #4: Entering information incorrectly

Sometimes, it’s the simplest mistakes that can cause the biggest headaches. Entering the wrong Social Security or tax  ID number, for example, or forgetting to sign your name can cause major problems in processing your return. To guard against such missteps:

  • First and foremost, double-check all numbers.

  • Check that all proper names are spelled correctly.

  • Compare this year’s tax return with the previous year’s to help determine if you’ve left anything out.

  • Double-check that you’ve signed and dated all relevant pages.

Using tax-preparation software can increase the overall accuracy of your return and help identify all the deductions you may be entitled to. However, even the best tax software won’t catch basic inputting errors, so consider enlisting a tax professional to give your return a second look or even prepare it from start to finish.

What you can do next

Managing an Inheritance
Saving for Retirement: IRA vs. 401(k)

Important Disclosures

The information provided here is for general informational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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