Let’s face it, mistakes happen—and it’s unlikely that you will conclude the upcoming tax return season with an error-free record. However, there are some common mistakes that crop up year after year—and that can be easily avoided by a thorough review of your clients’ returns. Here are some examples culled from the IRS’s recently released data on the top errors paid preparers made on recently filed returns.
#1: Names and Numbers
Surprisingly, one of the most common mistakes on both professionally and self-prepared returns are names and taxpayer identification numbers that do not match up with the IRS’s or Social Security Administration’s records. These errors can have a number of consequences. For example, if a taxpayer’s or spouse’s Social Security number is missing or entered incorrectly, the IRS will deny the personal exemption for the taxpayer or spouse. An error in a dependent child’s name or number can have more far reaching effects. In addition to denying a dependency exemption for the child, the IRS will also disallow the child tax credit for that child and will reduce or disallow taxpayer’s earned income credit if the child is a qualifying child for purposes of the credit.
The best way to avoid name and Social Security number mismatches is to ask new clients for a photocopy of each family member’s Social Security card. With this information in your files, you can be sure that the information you enter on the client’s return is 100 percent accurate. In addition, make sure that your return review procedures include verification that all names and numbers have been entered correctly on the return.
Tax return tip: Watch the calendar when efiling a return for a newlywed or other client who recently filed a name change with the Social Security Administration. According to the IRS, it takes two weeks after a name changed is filed before the IRS’s records are updated. If the return due date is fast approaching and it’s impossible to wait out the two weeks, the return should be filed on paper.
#2: Earned Income Credit
As in prior years, the earned income credit was a prime source of errors on both professionally prepared and self-prepared returns. A significant number of these errors included credit claims by taxpayers who were either too young (under age 25) or too old (over age 65) to qualify for the credit.
Tax return tip: Check birth dates carefully. For 2014, the EIC cannot be claimed by clients born before 1950 or after 1990.
#3: Capital Gains Taxes
Improper calculation of capital gains taxes was among the top errors on individual returns. These errors stemmed from failure to take into account the lower tax rates of qualified dividends and capital gains.
Tax return tip: The tax rate on qualified dividends and capital gains is 15 percent for most taxpayers for 2014. However, the rate drops to 0 percent for taxpayers whose regular marginal rate is below 25 percent and rises to 20 percent for taxpayers in the top 39.6 percent bracket.
#4: Social Security Income
Miscalculations of the taxable amount of Social Security benefits also cropped up on paid preparer returns.
Tax return tip: A common source of these miscalculations is failure to take into account tax-exempt interest and other excludable income in determining the amount of taxable benefits. Be sure to double-check your calculations to make sure you have “added-back” the appropriate income items and one half the client’s Social Security benefits to adjusted gross income before comparing the client’s income to the Social Security benefits tax thresholds.
#5: Self-Employment Tax
A significant number of Form 1040 returns contained errors in adjusted gross income due to failure to claim a deduction for a self-employed taxpayer’s self-employment tax.
Tax return tip: A self-employed individual is entitled to deduct one-half of his or her self-employment tax liability as a business expense in arriving at adjusted gross income. In effect, this deduction represents the “employer share” of the tax.
#6: Health Savings Account Deductions
With the number of taxpayers with health savings accounts (HSAs) growing each year, it is not surprising that errors in computing the deduction for HSA contributions have begun to show up on taxpayer’s returns.
Tax return tip: For 2014, the annual limitation on HSA deductions for a taxpayer with self-only coverage under a high deductible health plan is $3,300. The annual limit on deductions for a taxpayer with family coverage is $6,550.