Tax season can be challenging for professional tax preparers, but for the average taxpayer, who lacks the technical knowledge of a professional, it can be a confusing and daunting experience. Discrepancies and disputes with the IRS, while routine for public accountants, can be intimidating for everyday taxpayers. Below are the most common mistakes taxpayers encounter with the IRS.
1. Accuracy of Income Reporting
One of the most frequent issues involves discrepancies in income reporting. Taxpayers often receive income from multiple sources, including employment, investments, and freelance work—such as truck drivers—and it´s essential to accurately report all income sources. Inconsistent income reporting can lead to IRS audits and penalties if not addressed promptly, as the IRS has the authority to review bank statements for verification.
2. Deductions and Credits
Many taxpayers claim deductions and credits to reduce taxable income and lower their tax liability. However, issues arise when taxpayers claim deductions or credits that the IRS deems ineligible or insufficiently supported.
3. Filing Status
Choosing the correct filing status is essential to determine the applicable tax rates, deductions, and credits. Disputes can occur when taxpayers report an incorrect filing status that does not reflect their actual marital status or family situation.
4. Taxpayer Identity Theft
Taxpayer identity theft happens when someone´s personal information, such as their Social Security number, is stolen and used to file fraudulent tax returns or claim refunds. This is a growing issue as personal information becomes more vulnerable. The IRS, along with tax professionals, recommends that clients obtain an IP PIN (Identity Protection Personal Identification Number) to protect their identity.
5. Errors in Tax Return Preparation
Mistakes in income, deductions, or credit reporting can trigger IRS audits and result in penalties. Tax preparers should encourage clients to carefully review their returns before filing to ensure accuracy and completeness. The IRS can conduct audits to identify and correct errors and may impose penalties for negligent or intentional misreporting.
6. “Ghost Preparers”
“Ghost preparers” are individuals who prepare tax returns but avoid taking responsibility for them. Some of these individuals should not be preparing tax returns at all, while others may be qualified but refuse to accept accountability. They prepare the return but leave it unsigned or use someone else´s credentials to submit it.
By understanding these common pitfalls, taxpayers can take proactive steps to ensure a smooth tax filing experience and minimize the risk of disputes or penalties with the IRS.