Common goofs: There are many surveys published from time to time pointing towards small but costly mistakes the taxpayer makes. Here are the top five 1. Bad mathematics The number one mistake taxpayers make according to the IRS is incorrect additions and subtractions. Please ensure that your return is tested for arithmetical accuracy. The mistakes in transferring amounts from one schedule to another usually end up in correction notices. If these mistakes are leading towards a tax deficiency, then you are bound to receive a bill for that amount with interest and penalties. If you have overpaid by mistake, then its not that serious. The excess is used to compensate your future taxes or getting you a refund as per your request. 2. Omitting to report interest and dividends You should remember that IRS has strong counter checks to ensure the accuracy of your return. Cross checking of interest and dividends is a very common phenomenon with the IRS. IRS receives reports from banks, brokers, and other financial institutions and this information is cross checked with the returns submitted by the taxpayers. IRS tries to match 100% of the returns submitted electronically and it cross checks over 50 per cent of the returns they receive on paper. After such cross checking, IRS usually sends out notices for under-reported interests and dividends. 3. Losing the receipts It is a common incidence with many people that they do not possess the receipts for the deductions claimed. They are bound to lose the deductions. You'll need to keep all your receipts and checks at one place so that you can sort them out and report them correctly in your return. There is a period of limitation of three years applicable for the receipts. If you are unable to claim deductions within this stipulated time, you can't claim. Similarly IRS cannot ask about the supporting documents for these deductions after three years. So you need to keep these receipts for the period of three years. Make full preparations at the time of filing your return so that you can summit them and keep them at the time of audit, if required. 4. Mistakes in bunching of deductions There are some deductions which are allowed only if you exceed a minimum amount. For instance, in case of medical expenses, they are allowed to be deducted only if they exceed 7.5 per cent of your adjusted gross income (AGI). The miscellaneous deductions are allowed only if they exceed two per cent of your adjusted gross income (AGI). So the planning strategy for these types of expenses is to bunch them appropriately into a single year so that they exceed the minimum requirement limit. Suppose your adjusted gross income AGI is $100,000 then medical expenses which are in excess of $7500 will be eligible for deduction. You'll need to exceed this basic amount if you want that deduction so it may be a good strategy to prepay some bills before January 1. Similarly for miscellaneous deductions you need to exceed dollars 2000 threshold. Maybe you can pay your tax consultant before December 31 so that you can bunch that expense with other deductions and exceed the limit for eligibility. 5. Improper calculation of the "basis" The taxable amount of capital gains will be depending on the "basis" which is original value of your investments. When you make a sale your gain is calculated by deducting your basis from the sale amount. Suppose you reinvest some financial gains on your mutual funds. Then these gains are added to your basis so your taxable gain is a reduced considerably. For example if you buy a fund for $2000 and re-invest $200 from dividends then your basis is now $2200 for tax purposes. You need to check advices from your Fund Company or broker to ensure that you have the right figures. If you are unable to get the details by April 15 then either call for an extension or you can file an amended return later on. Always take care to see that these mistakes are not reflected in your tax return and your tax audit probabilities are reduced automatically.
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There are many mistakes looking small to you while preparing your return. However they can prove deadly on filing your return. You need to keep away from these mistakes, because all of them are avoidable easily.
Chintamani Abhyankar is internet marketer, tax professional and freelance writer. He has done a lot of research on tax systems and is advising people internationally on various aspects of tax planning over last 25 years. His masterpiece, Stop donating your money to IRS is an e-book on the tax secrets which only lucky people knew in the past. His easy to implement strategies can put thousands of dollars in your pocket. Grab a copy now!
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