Tax Preparation Problems

The Struggles and Pitfalls of Tax Preparation

Doing your taxes can be a real headache. With all the forms, calculations, and rules to follow, it’s easy to make mistakes or get taken advantage of. This article looks at some of the common problems people face when preparing their taxes, and gives tips on how to avoid them.

Not Having All Your Documents

One of the biggest issues is simply not having all your tax documents ready. You need your W-2 from work, 1099 forms for side income, mortgage interest statements, charitable donation receipts, and more. Tracking all this down takes time and organization. If you’re missing key documents when you go to file, you’ll have to go back and amend your return later, which is a hassle.

Get organized early – make a list of any forms you expect to receive and keep an eye out for them in the mail. Go through your records and pull together everything you’ll need. Reach out to employers, banks, etc. if you’re missing anything by tax time.

Errors Calculating Deductions

With so many different deductions and credits available, it’s easy to make little mistakes when adding everything up. For example, a study found 25% of people make errors calculating the home office deduction. Even small math errors can delay your refund or potentially trigger an audit.

Double check your work, and use online calculators or tax software to ensure you’ve calculated deductions properly. If your return is very complex, consider hiring a CPA to review it and make sure everything adds up.

Outdated Information

Failing to update your info with the IRS is another common pitfall. If you moved, changed banks, added dependents, or had other major life changes, you need to notify the IRS so they have accurate info on file. Otherwise, errors can happen.

Before filing, log into your IRS account online and make sure all your personal, contact, and financial info is current. Update addresses, add dependents, and review everything to prevent issues.

Incorrect Filing Status

Your filing status – single, married filing jointly, head of household, etc. – determines your tax rates and what credits/deductions you qualify for. Choosing the wrong status can cost you money or even trigger an audit if the IRS catches it.

Carefully review the rules and make sure you select the right status. Your marital situation, dependents, and other factors determine this. If unsure, the IRS Interactive Tax Assistant can help you choose.

Not Reporting All Income

You need to report all your taxable income on your return – not just from your regular job, but also side gigs, investments, rental property, prizes, etc. Even if tax documents weren’t sent to you (which they’re supposed to be), you still need to report the income.

Comb through your bank records to tally up all income sources. If you forgot to report something in a prior year, you’ll need to amend that old return. Always report all your income to avoid penalties.

Improper Business Expense Deductions

If you’re self-employed or have a small business, be careful with writing off expenses. Things like meals, entertainment, travel, vehicle use, and supplies are only deductible under certain conditions.

Review the IRS rules carefully and maintain thorough records. Make sure you can prove the business purpose if audited. Consider getting help from a tax pro if you have complex business expenses.

Carryover Errors

Some tax breaks like charitable donations and capital losses can be carried forward to future years if you can’t use the full amounts this year. But failing to properly carry over those amounts year-to-year is a common mistake.

If you have carryovers, review your previous returns and make sure you correctly account for any remaining amounts when preparing your current return. The paperwork can pile up, so stay organized.

Sloppy Record-Keeping

Good record-keeping is key to accurate tax preparation. You need to be able to prove deductions, business expenses, charitable gifts, credits claimed, and more if ever audited. Yet many people have poor records.

Keep a dedicated tax folder or digital space to store related receipts, forms, statements, and other documentation. Be thorough and organized so you have solid evidence to support your return.

Outdated Tax Rules Knowledge

The tax code changes regularly, but many people prepare their returns simply relying on how they’ve always done it. You need to be aware of any changes that impact your situation.

Review the IRS website and tax news sources for updates each year. Key changes can include inflation adjustments, income bracket shifts, deduction rule tweaks, credits being added/expired, and more. Don’t get caught unprepared.

Not Reading the Instructions

Forms come with instructions for a reason – they explain exactly how to fill them out properly. But many taxpayers just skip reading the instructions altogether, often leading to mistakes.

Never assume you know how to complete a form, no matter how straightforward it seems. Carefully read the instructions every time to avoid errors and learn of any changes.

Rushing at the Last Minute

Preparing your taxes takes time and focus. Yet every year, people rush through their returns at the last minute just to get it done. This leads to foolish mistakes.

Give yourself plenty of time, avoid distractions, and double check your work. If you need an extension, file Form 4868 to get a few extra months. Rushing always increases errors.

Not Using Tax Software Correctly

Tax software like TurboTax can be a lifesaver for DIY tax prep. But the results are only as good as the information you put in. Using the software incorrectly can undermine its effectiveness.

Read the instructions carefully, take your time entering data, and review the questions asked. Make sure you fully understand the prompts and provide complete/accurate responses.

Falling for Tax Prep Scams

Unfortunately, there are plenty of shady tax preparers and services looking to take advantage of taxpayers. Watch out for promises of unrealistically large refunds, offers to file before getting your documents, requests for payment upfront, etc.

Be wary of anyone who seems sketchy. Thoroughly research preparers and only use reputable national chains or CPAs/Enrolled Agents. The IRS tips can help you choose wisely.

Not Responding to IRS Letters

If the IRS sends you any letters requesting more information, it’s crucial that you respond promptly and completely. Ignoring these letters can lead to delays, penalties, and bigger issues down the road.

Never throw away IRS letters. Open them right away and follow the instructions. Call them with any questions and provide the information they request. Get professional help if needed.

Forgetting About State Taxes

Your federal return is just one part of the tax equation – don’t forget about state income taxes as well! The forms, rules, and deadlines vary in each state.

Make sure you know the requirements and forms for your state. Complete your federal and state returns early to avoid issues. If you moved states, be aware of differences in the tax codes.

Not Planning for Payment

Many people focus only on maximizing their refund…until they end up owing taxes! Then they panic, not having planned for the payment. Always know your bottom line.

If you’ll owe taxes, plan ahead to have the money ready via withholding adjustments, estimated payments, etc. Explore payment plans and loans if needed, and file on time to avoid penalties.

Conclusion

Mistakes and mishaps when filing taxes are common, but being aware of the pitfalls can help you avoid them. Give yourself plenty of time, get organized early, know the requirements, follow instructions carefully, and leverage available tools. Pay attention to the details, and don’t be afraid to get professional help to ensure your taxes are done right.