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Keeping Your Balance: Avoiding common errors when filing a 1040

And some interesting disallowed deductions

Ryan Snyder

It’s that time of the year again and filing your tax return becomes the ultimate candidate for procrastination. As the filing deadline approaches this year, filers will be scrambling to compile their tax returns and errors can occur. An important tip for accuracy is to remain organized year-round with tax records centralized and ready for access.

While that may be your best defense against errors, it may already be too late for you at this point in the filing season. Using the prior year’s return as a checklist is useful when you need a reminder of what items will be needed to complete your return. Being knowledgeable about the most common errors identified by the Internal Revenue Service may help you avoid unnecessary filing penalties.

One of the top errors is one of simple arithmetic or the use of an incorrect tax table. Errors occurring when calculating your income tax liability are usually due to using a tax table for an incorrect filing status or using the incorrect line corresponding to your taxable income. This error is easily avoided by ensuring your filing status agrees to the tax table you are utilizing and double checking to ensure you are in the correct row based on your taxable income. You should also make sure to apply the appropriate percentage to your earnings in excess of the base in addition to the base liability.

Another top error is being unfamiliar with the eligibility requirements and calculations for the Making Work Pay Credit, the Earned Income Credit or the Government Retiree Credit. In most instances, this error will be caught by the IRS, which will calculate the credit for you and adjust your tax liability. Relying on the IRS to check your return and discovering the error is not a recommended course of action.

Using an incorrect standard deduction or exemption amount is another common error. Taking a couple of extra minutes to review the definitions of the various filing statuses and relevant deduction or exemption amounts will save you from committing this error. Sometimes the error is driven by what someone else is filing as in the instance where a child files as independent to decrease their tax liability while not realizing the implication to you if you are claiming them as a dependent on your return.

Ensuring you are having conversations with dependents or those who previously qualified as dependents will help ensure these errors do not occur. Again, in most instances, the IRS will likely detect these errors and appropriately adjust your return, but if additional funds are owed, filing penalties could apply.

Clerical accuracy is another common error detected where the various forms will not reconcile to each other or are not mathematically accurate. These errors, along with errors in Social Security numbers, taxpayer identification numbers, and names of taxpayers or dependents not agreeing to IRS records, lead to the IRS making corrections to many returns. Again, these errors can lead to unnecessary filing penalties and delays.

Failing to identify sources of income that are subject to preferential tax treatment is an error that can cost taxpayers dearly. There is preferential treatment for qualifying dividends and capital gains. The IRS may not have the information necessary to make this determination and this mistake can prove very costly for those who do not take care to properly identify these income sources.

The difference between your marginal tax rate and the lower rates available for qualified dividends and capital gains is substantial and has a large impact on your calculated tax liability.  Tracking your basis (including reinvested dividends which increase your basis) in investment assets is also important. Using a basis that is too low will cause you to be taxed on money you’ve theoretically already been taxed on. Using a basis which is too high runs the risk of being caught by the IRS or during an IRS audit and the penalties can be substantial, especially if it is determined that the error was intentional or that you were willfully negligent in the determination of basis.

Many tax filers want to minimize their tax costs and a well-known way of accomplishing this is to maximize itemized deductions, assuming the expenses, which are subject to specific limitations, exceed the standard deduction. Some commonly overlooked deductions are: mileage and other travel expenses incurred while obtaining healthcare services for yourself or a dependent; costs associated with filing your tax return or associated with the determination, collection or refund of any tax; qualified training and educational expenses; volunteer or donation related expenses; student loan interest paid by the parent of the student which is deductible on the parent’s return; costs related to a job search; and medical expenses of a dependent. There are specific rules for many of these deductions and an experienced tax advisor should be consulted with any questions.

Many taxpayers have taken certain liberties with deductions and in these cases taxpayer deductions were ultimately disallowed with the taxpayer being responsible for filing penalties. A taxpayer attempted to take depletion expense against their income earned from donating blood. The argument was that the expenses covered the loss of their blood’s mineral content and the loss of their blood’s ability to regenerate. While an allowable expense for many businesses that harvest natural resources such as coal and oil, the IRS did not accept the depletion charges related to taxpayers’ bodies.

An employee of a high-end boutique attempted to write off the purchase of high end clothing as it was required for work. The employee only wore these outfits to work and they didn’t consider them appropriate wear in their lives outside of work. The IRS determined that the clothes were suitable for outside of work and disallowed their deduction.

A taxpayer had a home built and it was discovered that the home had a number of problems with it, many of them structural. The taxpayer attempted to take a sizeable tax a deduction for a theft loss on their return. The IRS did not accept this position as they determined the taxpayer was not to be a victim of fraud, but of poor quality work.

While filing taxes is not an enjoyable experience for anyone, errors in returns can lead to headaches and financial penalties down the road. Avoiding procrastination and taking time to read and understand the directions for the forms which you are filing are two important steps you can take to avoid costly and time consuming scenarios.

By signing your return you are attesting to the information being true, accurate and complete. Returns are subject to an audit within three years of filing, if substantial errors are found in an audit, the IRS can extend this window and look into older returns. Having a qualified tax advisor working with you to complete your return can reduce the amount of time you need to spend completing your return and reduce the instances of errors and possible penalties.

Ryan Snyder, CPA, is a manager at Mengel, Metzger, Barr & Co. LLP. He can be reached at Rsnyder@mmb-co.com.