Seven common mistakes in tax preparation

March 25, 2020 3:16 PM

Advancements in technology have significantly reduced the risk of tax preparation errors, but not all of them. While some of the items below seem obvious, even the most seasoned CPAs and tax professionals have been known to commit these tax preparation no-nos. Whether you are a 20-year accounting veteran or just entering the field, it behooves you to keep a list (and check it twice) of the most common tax preparation blunders. Based on Bloomberg Tax & Accounting’s in-depth research, here is a partial list of the common mistakes in tax preparation.

Assuming the wrong due date

April 15 is known as the due date for individual returns (and some state returns), but that is not always the case, especially this year when the date has been pushed back until July 15 because of the coronavirus pandemic. Generally, if a due date falls on a Saturday, Sunday or legal (state or federal) holiday, filing a return is generally considered timely if it is filed no later than the next “business” day. However, if your client is required to file in a state celebrating a legal state holiday that lands on April 15 (as was the case for Patriots’ Day in 2019), then the state tax filing date would change, but generally only at the state level. In other words, it is possible for a client to have two different filing due dates: one for state, and one for federal.

Confusion over the most advantageous filing status

Filing status impacts eligibility to claim certain deductions and credits and the amounts of those deductions or credits. Sometimes a client’s filing status is cut and dry, but in other cases, it is not so obvious. For example, if your client’s spouse recently died or they have recently separated or divorced, and they have children under the age of 24 or other dependents, they may be eligible to file as either married or head of household. Determining which status is most beneficial requires careful consideration, and of course, is different for each client.

Not claiming the Earned Income Tax Credit

The Earned Income Tax Credit benefits eligible taxpayers that work and have earned income under a certain amount. Because it is a tax credit, it reduces the amount of tax you owe, dollar for dollar, and it may also create a refund for the taxpayer, even if the tax liability is zero and no income tax has been withheld. Filing the EITC does come under more IRS scrutiny so double-checking eligibility is probably wise.

Failing to list all information for dependents

Failure to include all people who qualify as eligible dependents of the taxpayer may result in higher tax liability for the taxpayer and affect the taxpayer’s filing status. Babies born towards the end of the year qualify as a dependent for that entire year, regardless if they were born on Dec. 31. Tax preparers should carefully work with their clients to examine the requirements for claiming children, parents and other relatives for whom the taxpayer provides at least half of their support in order to maximize eligibility for certain tax benefits such as head of household filing status, the child tax credit, the credit for dependent care expenses, and the credit for other dependents.

Forgetting to include interest and dividends

Taxpayers with multiple accounts, or those who receive insignificant amounts of interest or dividends, are likely to forget to include the amounts on their return, especially if they file their taxes early before all 1099s arrive in the mail. This results in the omission of income, which can lead to the imposition of penalties and interest on any additional amount owed that wasn’t accounted for on the original return. Be sure to ask your clients, especially the ones who file early, about this often-overlooked income.

Forgetting to include early withdrawals from retirement accounts

When taxpayers make early withdrawals from retirement accounts, they often forget to provide this information to their accountants. They also often fail to account for the 10 percent additional tax on early distributions before age 59 ½ or whether an exception applies. Explicitly asking clients if they have made an early retirement withdrawal or rolled over retirement funds into another qualifying account could prevent an omission of income and/or underreporting of tax liability.

Failing to report transactions in cryptocurrency or other virtual currency

Transactions in virtual currency (e.g., Bitcoin) are “hot” right now. But taxpayers often do not realize that cryptocurrencies are treated as property for federal income tax purposes and taxpayers must recognize any capital gain or loss on virtual currency transactions (subject to any limitations on capital losses). The IRS has a compliance campaign focused on cryptocurrency transactions and has ramped up enforcement efforts in recent months. There is also a new question about cryptocurrency on the Form 1040. Educating your clients about cryptocurrency reporting and taxation rules can help avoid problems in the future.

Potential tax preparation errors are endless. While some mistakes result in a simple recalculation of the tax liability, others can result in a full-blown IRS audit. Knowing the most common tax-filing blunders is critical to preventing such mistakes and the serious headache that comes hand-in-hand with IRS scrutiny.