Understanding the most common mistakes CPAs make and where responsibility lies for tax return errors can help demystify the process during tax prep season.
Tax season: as much as we dread it, it’s unavoidable. And tax return mistakes put you at risk of prolonging the process with more payments, return corrections, and all the headaches that come with untangling red tape. Even when working with a Certified Public Accountant (CPA) or other professional tax preparer, mistakes on your tax returns could still cost you.
Understanding the most common mistakes CPAs make and where responsibility lies for tax return errors can help demystify the process. Streamline your tax prep with a clear plan that bears common pitfalls in mind and works to avoid them. Setting your mind at ease with this due diligence is well worth the time commitment. Plus, what’s not to love about keeping money in your pocket?
Here’s what to keep in mind when looking for tax return errors, and some recommendations for avoiding mistakes and reducing tax anxiety.
4 Common Mistakes CPAs Make
When CPAs and other tax professionals make tax prep mistakes, they tend to fall into broad categories. When reviewing your tax return, keep an eye out for:
Incorrect Income Reporting:
It’s probably not surprising that incorrect, inaccurate, or incomplete reporting of income is a costly mistake for both your family and your tax preparer.
Clerical Mistakes or Omissions:
If there are signatures missing from your tax return, or lists missing related to itemizing and deductions, you’ll be spending more money and time on your taxes than you budgeted for. And don’t forget, your tax prep professional is required to provide you with copies of any returns they submit on your behalf.
Schedule E Errors:
You can use Schedule E “to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits.” Errors in reporting the correct amounts of income/losses from any of those sources increase the chance of higher tax payments and lower refunds. Likewise, depreciation should be factored into these values each year, otherwise, a penalty can be incurred.
Taking the Lesser Deduction:
There are numerous ways to take deductions on your tax return, but sometimes one choice is the clear winner. For example, state income tax deductions are often smaller than those for federal income taxes. But if your CPA accidentally takes the lesser deduction, your refund gets smaller. Which deduction is best varies depending on the cost of living in your area.
Knowing what to look for in advance means fewer errors fall through the cracks, meaningless worries about return corrections or additional payments down the line.
Who’s Responsible for Tax Return Mistakes?
The answer to who’s responsible for mistakes on your tax return is twofold. On one hand, the Internal Revenue Service will seek funds from you for any additional tax payments that need to be made as a result of correcting errors in your return. But this doesn’t mean your tax preparer has no consequences. They could be subject to fines for any number of errors on your tax return, including omitting signatures, lists, and deductions. The IRS can also work with you on resolving the errors, especially if you believe the information reported on your returns was done in good faith, rather than willfully.
De-Stress the Process
8 Proactive Tips for Avoiding Tax Return Errors
You’ve already got a lot going on. You don’t have time to sift through the ins and outs of the 70,000 pages that make up the U.S. tax code to make sure your returns are perfect, especially if you’re already paying someone to prep them for you. But you can take a few steps to feel more mentally (and practically) prepared for tax season. Here’s what to do:
Choose a Best-Fit CPA/Preparer:
Different tax preparation companies and CPA firms specialize in different things. If you’re looking for a CPA, choose one who is going to be familiar with local tax codes and regulations. You may want to focus on working with someone who serves other clients in your demographic. For example, you might look for a firm that focuses on individual/family returns, one that can assist with estate-related tax questions, or one that has a great track record for clients with rental properties. It’s always a good idea to do your homework before hiring a CPA. What are their reviews like? What kind of complaints or praise have they received from other customers and clients? Make an investment in someone trustworthy and efficient, and your tax season will go a lot more smoothly.
Get a Bird’s Eye View:
The tax code changes periodically based on new laws, rules, and regulations. Learning the major changes that will take effect in a given year, and how they affect you, can help you prepare for filing a more thorough and accurate return. And you may discover deductions and credits you didn’t realize you applied for.
Have Clear Expectations:
Review any contracts you’ve signed with your tax prep company or CPA so you can have clear expectations of obligations and responsibilities on each side on the front end.
Store Tax Forms Together:
Your banks, brokerage firms, and any other financial institutions where you have open accounts will send you tax forms. You may also get forms from your health insurance company, from the Social Security Administration, and from other federal agencies from which you receive benefits. Look for your 1040, 1099, or W-2 (wage income), Schedule E (rental income and expenses), and Schedule C (business income and expenses). Make a list of everything you expect to receive, and file everything together once it arrives, storing them in a safe, secure place. Review them ahead of time to familiarize yourself with the fields on the documents, since they’ll match up with the required fields on your tax return.
Keep Your Receipts:
Keep receipts and any other documentation of work expenses, healthcare expenses, and anything else that might be tax-deductible. Your tax preparer can give you more details about what does and doesn’t qualify.
Give your CPA this documentation as soon as you have all of it in hand, so there is plenty of time to check the return.
Look for Empty Spaces:
If there are a lot of empty spaces on your tax forms where deductions should be, it’s a good idea to check with your CPA. You want to make sure you’re claiming any deduction you’re entitled to by listing as many applicable expenses as you can on your return.
Review and Confirm:
Once your tax return is complete, review everything. Go over any questions you might have with your CPA or tax preparer before they file. Make sure you receive a copy of your return, and that you keep that return for 7 years before disposing of it.
The Bottom Line: Keep Calm and File On
If you and your tax prep professional are both doing your best to work together in good faith, you’ll likely have an uneventful tax season. If you are audited, you may be asked to substantiate a deduction by providing additional documentation. The IRS and your CPA will let you know what you can provide, and then will either allow or disallow the deduction based on the information you give them. Mistakes and omissions can usually be corrected with amendments to the return, and the IRS will let you know if anything further is needed from you.
As you check your return and get your questions answered, you’ll gain insight and ideas about how to structure and track your documentation of income and expenses throughout the year, so that they align as best as possible with the information you need for your return.
Bottom line: there’s no need to hole up at your dining room table with the tax code and a calculator. But knowledge is power. Learning what the fields on one or two forms mean, and making sure they’ve been filled in accurately, will only help you feel more prepared next tax season. Making your best effort is the most important thing when it comes to working with a CPA, getting your questions answered, and filing a clear and accurate tax return. You’ve got this, and you don’t have to go it alone.
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