Tax filing mistakes can be costly for your business. Tax preparers must invest time and effort to resolve tax mistakes, and the process is frustrating for clients.
You need controls in place before tax season to minimize the risk of tax filing errors. Meet with your team to discuss the topic before you’re under time pressure during tax season.
If a taxpayer’s return is filed electronically and rejected, the IRS will provide a reason for the rejection. If you made a mistake in entering a Social Security number, a payer’s identification number, omitted a form, or misspelled a name, you can correct these errors and electronically file your tax return again.
Manual returns require more time and effort to correct, and you should encourage clients to avoid filing any returns manually.
Here are some common tax filing mistakes and tips for avoiding these problems.
These errors occur when the taxpayer provides the wrong number or if the tax preparer makes an input mistake. There are two ways to verify the correct Social Security number (SSN):
Encourage taxpayers to carefully review each SSN listed on the tax return before the return is filed. Most taxpayers have their SSN memorized, and they are best positioned to catch an error.
If an ITIN isn’t used on a U.S. federal tax return for any 3 consecutive tax years, it expires on December 31 after the third tax year of non-use. You must renew an expired ITIN if it will be included on a U.S. federal tax return.
These individuals do not need an ITIN number:
Before filing a tax return for a client, discuss the ITIN and determine if the individual should apply for an SSN, instead of a renewed ITIN.
The name shown on the taxpayer’s Social Security card should match the name used on the tax return.
Newly married taxpayers may contact the Social Security Administration (SSA) to change the name on their Social Security card. However, they can elect to file married filing jointly without changing their name with SSA.
If the taxpayer hasn’t changed their name with the SSA, you’ll need to show the former name on the tax return instead of the married name to avoid tax processing delays.
Most taxpayers have either W-2s or 1099s (or both) to document income, and tax preparers request these forms. Other forms and schedules are often included to support specific deductions and tax credits.
Tax software may provide a document checklist based on the tax preparer’s input. Software can also alert the preparer to include missing tax forms.
Your clients may sign and date tax forms in person or electronically before they are submitted. Make sure that both taxpayers sign joint tax returns.
Use IRS e-filing in your tax practice. This technology allows you to send a link and have clients sign the return remotely. Both you and the client will receive a confirmation that the return was dated and signed.
Tax rates, the standard deduction, and some types of tax credits are affected by the taxpayer’s filing status.
When you discuss the tax year with clients, pay attention to these situations that may change the filing status in current or future years:
Invest the time to discuss these complex rules with clients.
If a tax return is submitted with a math error, the IRS sends the return to the Error Resolution System. Once the math error is corrected, the IRS sends the taxpayer a notice detailing the correction and the new balance due or refund amount owed.
Work to avoid math errors by double-checking the data you input into tax return software. If you’re transcribing information from a hardcopy document, carefully verify each number as you input it.
With tax software, you minimize the risk of math errors, posting data to the wrong line in the tax return, or using incorrect tax tables.
Congress continues to add tax credits and deductions to the tax code, making tax compliance more complex.
Stay on top of recent changes to the tax code, so that you can advise clients about deductions and tax credits. When you post a deduction or credit to a client’s return, verify that you’ve attached all supporting forms and schedules.
Taxpayers want to receive tax refunds as soon as possible, and incorrect bank account numbers slow down the process. Ask the client if they are using the same account information from the prior year.
Confirm the taxpayer’s bank routing number and account number before submitting the return. Ask the client to verify the data using a physical check or deposit slip.
If the client prefers the refund by check, confirm the address you have on file. Use this IRS link to track the status of the refund.
Have a detailed discussion with the taxpayer to identify each type of income. New income sources might include:
Verify income sources by reviewing 1099s, K-1s, and other documents. Review the prior year return and determine which income sources apply to the current year.
Taxpayers who expect a refund may be anxious to file returns, but the return should not be filed until all tax documents are available. Educate your clients on the due dates for key documents, including W-2s, 1099s, and K-1s, so they understand the timeline for filing returns.
Reach out to clients for missing documentation as filing deadlines approach. Taxpayers must also be aware that they may receive corrected tax documents, which must be entered into the return before filing.
Communicate with clients to minimize frustration about tax filings.
The IRS assesses penalties for late filing and for not filing a return.
For individuals, the late filing penalty is 5% of the tax due (less any tax paid on time and available credits) for each month or partial month the return is late. The penalty accrues up to a maximum of 25%.
The penalty for failing to file is:
If the return is more than 60 days late, the minimum penalty is the amount listed or 100% of the underpayment, whichever is less.
If a client has not made an effort to get you their tax documents, explain the penalties. Point out that filing before the deadline is critically important.
Taxpayers should understand that requesting an extension to file does not extend the time that tax payments are due.
Using an incorrect address can delay receipt of the tax return, which may result in late filing penalties. Use IRS publications to confirm the correct mailing address for client returns.
If the return is not mailed due to insufficient postage, you may miss the filing deadline. Postage rates have increased four times since January 2023, and you should be careful to use the correct amount of postage when you mail physical tax returns.
Reliable tax software can help you save time, reduce error rates, and provide high-quality service to your clients. Sigma Tax Pro provides industry-leading software solutions and tax preparation support at the lowest prices available.
Tax professionals can collect preparation fees directly from taxpayer refunds and may also be eligible to offer taxpayer cash advances when using Sigma Tax Pro’s preferred bank product partners.
Set up your firm for a more successful tax preparation season. Reach out to Sigma Tax Pro today to learn more.
