The Pitfalls of Preparing Your Own Tax Return

Tax Return

While we may think that paper returns are a thing of the past, millions still rely on this. Paper filers are 20 times more likely to make mistakes on their return though.

With another tax filing season upon us, it is also time to reflect upon the potential pitfalls out there when preparing your return, and this is particularly important for those who prepare their own rather than having a tax professional do it.

The end of January signifies the time that the IRS will accept electronic returns, and leveraging your computer and software written by tax experts can go a long way toward avoiding mistakes and turn the do-it-yourself experience into one that is more manageable.

Many of us can recall a time where this was the only way to file, and probably will also recall just how much more difficult preparing paper returns are, and how much easier electronic returns have become. Many still file their return by mailing in paper returns though, and they need to be especially careful.

The IRS says that people who file by paper are 20 times more likely to make mistakes, which doesn’t mean that you will make one, but it means that the opportunity to do so is so much higher if you are either not informed or careful enough. The guidance built into electronic programs does serve to guide people quite considerably as it turns out, which is not surprising actually to those who have tried both methods.

When people make a mistake on their taxes and have them pointed out, they do tend to remember them, especially the ones that end up costing them money. If there is a penalty involved, this can make the experience even more memorable.

Some Very Simple Mistakes to Avoid

Many mistakes don’t cost money but they do result in delays, for instance if the IRS cannot read your social security number on your return, which actually is a pretty common mistake according to the IRS. People also will enter wrong names on their return, ones that don’t match up with their SSN, which is going to obviously be a problem.

Other common mistakes that the IRS sees are not selecting your proper filing status, things like “single” or “head of household.” We need to get these basics correct before our return can ever be processed.

Another popular mistake that is seen with paper returns is errors in calculations. While the math with returns usually isn’t that complicated, and can be done with a simple calculator generally, people do make mistakes with such things. Having a computer program do this all for you is the best way to avoid this happening, although you still have to be careful to input the right numbers in the right places or this won’t matter.

If you’re looking to get a refund deposited into your bank account, and you did not provide accurate banking information, this deposit cannot be made, or worse, your refund might even find its way into someone else’s account, so it pays to double check this.

Signing your name in the required places might be the most basic part of preparing it, but there are still people who do not sign forms that they need to, including not signing the return itself. These signature requirements are there for a reason and not optional. You also need to make sure that your signature is dated where indicated. This is another one that is particular to paper-based returns, which is the case with most of these so far.

Deductions Have the Biggest Potential for Serious Mistakes

As for deductions, that in itself can be a minefield for those not knowledgeable enough. Some returns are far more complex than others, and with the more complicated ones, getting a professional to prepare it for you can be the most sensible option.

Even with simpler returns though, we can get plenty of things wrong. This can range from not taking full advantage of deductions we are entitled to, missing deductions entirely, claiming excessive amounts for them, or claiming deductions we’re not even allowed to.

Deductions are the real meat and potatoes of a return, and getting this right is very important, but as it turns out, even people who file fairly basic returns often do not have the proper knowledge to do so properly.

NerdWallet did a survey last year with people who earn less than $50,000 per year and only 25% of them were able to answer questions about basic and common deductions correctly. About half did not even know which tax bracket they are in, which leaves us wondering just how capable they are of filing their returns themselves.

To be fair though, electronic filing does make this so much easier, and while we may not know certain tax rules, the program does, and when we’re prompted for information about various things that we may potentially be able to use for deductions, we may be able to get by just fine by just following along with the program.

When we file on paper though, and don’t know what we’re doing, even a simple return can leave us pretty lost. We’re on our own in this case, with no guiding hand other than our own, so we need to make sure our hand is guided well enough to prevent some real mistakes, especially ones that can result in audits or penalties.

The IRS tells us that 9% of us file our taxes on paper, with another 8% getting a friend to do it for us, and unless our friend really knows what they are doing, this can lead to trouble as well. For the relatively uninformed, the friend may know more than they do about filing taxes, but that still may not be all that much and can fall well short of the mark.

Another 9% use electronic filing but use a free service, and according to the IRS, the old adage of you get what you pay for applies here as well. The IRS offers a tax program that is of good quality, and it is free to use if your income is $70,000 or less, but only about 1 in 7 people that would be eligible for this take advantage of it.

The biggest thing that we can do to help ourselves here is to make sure that our taxes get prepared properly, and if this means shelling out two or three hundred dollars to get a pro to do it for us, this can be a better option than messing it up ourselves.

If we do decide we can handle this, we can save money but want to make sure that we choose a high-quality program, and only choose to file a paper return if it is both simple and we are capable of doing this without making some real mistakes and are willing to be extra diligent.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.