Tax: 5 Foolish Tax Filing Mistakes
Last-minute filers tend to be the most error-prone taxpayers, making lame and foolish mistakes that can either cost them money, land them in hot water with tax authorities or delay their refunds for months.
Haven't filed yet? Then this means you. The annual tax filing deadline is just a week away. The deadline, in case you missed it, is April 18th this year because of a District of Columbia holiday for Emancipation Day. That gave you an extra weekend to file -- and another reason to procrastinate.
The most common last-minute mistakes are stupid errors, like failing to sign a paper return or juxtaposing a few numbers in a Social Security number. Those mistakes can hold up your refund, but you could do worse. Here are five foolish mistakes you should avoid.
Filing on paper: Filing a paper return is both inadvisable and unnecessary in today's age, when tax filing software will not only check your math, it will troll the tax code for obscure breaks that you'd otherwise miss. Since there are really lucrative deductions -- like the one-time deduction for health insurance premiums for self-employed people -- that are too short-lived to even show up on the 1040, your chance of knowing about all of them without spending hours studying the tax code is one in a zillion.
Paying for free software: But you don't want to waste money on tax software? If you earn less than $57,000 annually, there is no need to buy anything. The Free File Alliance, a group of software companies that includes all the big names such as TaxCut and TurboTax, provide free software -- the same stuff that costs you between $40 and $100 if you're buying it retail. All you have to do to get this software is go to www.irs.gov and click on the link at the top right-hand side of the page that says "I want to efile my return for free."
The Free File Alliance only provides free filing of federal returns. They're likely to charge a fee to transfer your information and file your state tax forms. If you want to avoid the inconvenience of handling your state return separately, pay the $10 or $20 state-filing fee. But know that many states offer free online filing, too. If you want an all-free filing season, go to your state's web site to see what they offer.
Fudging the Numbers: Earth to taxpayer, the IRS has been expanding it's "matching" information program for more than a decade and it's now really, really good. Your employers, banks, brokers and mutual fund companies are all sending the IRS information about how much they've paid you and how much you've paid in deductible interest. If the numbers on your return don't match the one's the IRS already has, guess what happens? Exactly. Game over. You lose.
If it appears that what you've done is a mistake rather than larceny, you'll just owe tax and penalties. If it's more larcenous than a mistake -- particularly when the numbers are big -- you are likely to single yourself out for an in-person audit and real tax woes.
Failing to file: If you know that you're going to owe taxes and don't have the means to pay, it can be tempting to ignore the deadline. But it's one of the biggest tax mistakes you can ever make. The repercussions of failing to file a return are far worse than the repercussions for failing to pay all you owe. Specifically, if you fail to file, the IRS can assess a penalty of 5% of the amount due for every month you're late. They cap that penalty at 25% of the tax due. But, think of it....In April you owe $1,000. In May, it's $1,050; June $1,100 and a whopping $1,250 by September. Late payment penalties load up on top of that.
What's the penalty if you can't pay? One tenth as much -- one half of one percent per month.
Man up. If you can't afford to pay, confess and file. You might be surprised at how accommodating the IRS can be when you're honest, polite and forthright. If what prevented you from paying was a temporary set-back, like a job loss or medical problem, chances are good that the IRS will allow you to catch up with your tax obligation over time through an installment agreement. That's a lot better than accumulating an ever-rising tax debt.
Demanding a check: Like the rest of the world, the IRS is trying to go paperless. That saves a fortune on printing and mailing checks. All they require from you is bank information so that they can deposit your money directly into your bank account. By going paperless, you get your refund dramatically faster -- in a matter of days, rather than the multiple weeks it's likely to take when you file this close to the deadline.
Sure, it's fun to get checks in the mail. But the average refund is $3,000. If you get $3,000 deposited in your bank account a month sooner, you'll earn interest amounting to....well, about 83 cents. But, hey, that could allow you to play the big spender the next time some cute kid is looking for a quarter to feed the gumball machine. Save some time (and a tree) and go for direct deposit of your refund.
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