Making an error on your tax return isn’t the end of the world. In many cases, the IRS will make the correction themselves and notify you of the change. If the error cannot be corrected by the IRS, you will be notified to make the correction yourself. Of course, any error can lead to a delay. If you are due a refund, it’s not that big a deal. If you owe the IRS taxes, an error that causes delays can lead to complications that culminate in penalties and interest.
Understanding what’s at stake can help you file accurately every time. Let’s take a look at the most common tax errors in an effort to avoid them.
Most Common Tax Errors
The “Typo”
The most common error on tax returns is missing or incorrect social security numbers. To avoid delays, check and double-check your social security number and those of your spouse or dependents against official social security cards before filing your taxes.
Another common error is incorrect or misspelled names. If you file electronically, like 78.6% of Americans did in 2024, check for typos before filing. The names you report on your tax return must match the names and spellings on your social security cards. Do not use nicknames or initials on your tax return unless they match your social security cards.
Entering numerical information inaccurately from W-2 and other tax forms is another common error. While tax software can help prevent errors in calculations, only you can ensure information from all your tax documents is entered correctly.
Most electronic filers use bank routing and account numbers to pay taxes they owe or have their refunds directly deposited. Unfortunately, many taxpayers record incorrect bank routing or account numbers on their tax returns, delaying refunds and tax payments, which can lead to interest payments.
Since most Americans are filing electronically, unsigned returns are less common in recent years than in the past. If you choose to file a paper return, don’t forget to sign before sending. In most cases, your spouse must also sign a joint return.
The Actual Error
In their haste to file a tax return, some taxpayers file before they have received all the tax documentation needed to file an accurate return. Most people know not to file too late. But filing too early can also cause issues. Most institutions are required to send tax statements by January 31. If you have not received or been notified of how to obtain tax documents by February 15, notify your institution. And don’t file your taxes until you have all the information you need to file correctly.
Some taxpayers, especially those who are single or married filing separately, mistakenly file as head of household because they don’t understand that “head of household” is designated only for single taxpayers with dependents. Don’t let an incorrect filing status create problems with your tax return. Be certain you understand the differences between each filing status before filing.
Misunderstandings about credits and deductions can cause serious issues with your tax return. If you file for a credit or deduction for which you are ineligible, you will likely incur penalties and interest, and you can significantly increase your chances of being audited.
Filing an extension does not exempt you from paying your taxes on time. Failing to pay your taxes when filing an extension is a common error. Unfortunately, the extension applies only to filing the return. If you must file an extension, you should estimate the amount of taxes you owe and pay in full to avoid penalties and interest. Once your return is filed, you will receive a refund if you overpaid.
Most Common Outcomes of Tax Errors
While there is no particular penalty for filing your taxes incorrectly, you can incur penalties and interest on your unpaid balance if you owe more taxes than you’ve paid. In other words, if you don’t owe additional taxes, you will not receive a penalty for filing incorrectly. But if you do, errors can cause serious consequences.
Errors That Incur Interest But No Penalty
If you make an “honest” mistake, one that many people make by, for example, accidentally recording an incorrect social security number that causes the processing of your tax return to be delayed, you will likely not be assessed a penalty. However, if that mistake prevents you from paying your outstanding taxes by April 15, you could be responsible for interest.
The IRS notifies taxpayers of unpaid balances via mail with a due date that is 21 calendar days after the notification is made. Interest rates vary by category, year, and quarter, but most taxpayers will pay 8% compounded daily interest. That means the interest payment is based on the previous day’s balance plus the interest accrued that day … every day it goes unpaid.
To avoid paying exorbitant interest fees, you should pay your balance in full the day you receive notice that you owe more in taxes. Better yet, don’t make errors on your tax return.
Errors That Incur Interest And Penalties
The IRS only charges penalties for two accuracy errors:
Negligence or disregard of the rules or regulations
Substantial understatement of income tax
Negligence occurs when you don’t make a reasonable effort to follow tax laws. Disregard occurs when you blatantly ignore the rules and regulations. Substantial understatement of income tax occurs when you understate your tax liability, or the amount you owe in taxes, by 10% or more.
In either case, the penalty is 20% of the unpaid balance as of April 15.
For example, if you purposefully falsify your tax return to save $5000 in taxes, you will be charged a penalty of $1000.
The IRS notifies taxpayers of penalties by mail with a due date 21 calendar days after the notification is made. If the penalty is not paid by the due date, you will be charged an additional penalty for non-payment, which is .5% of the unpaid tax per month. You will also be charged interest on the penalty AND on the outstanding balance. For most taxpayers, the interest is 8% compounded daily interest.
To avoid additional penalties and interest, pay your outstanding balance and penalties as soon as you are notified of an error. To avoid further complications, be as accurate and honest as possible when you file your taxes.
Key Takeaways:
It’s easy to make a mistake on your taxes. Purposeful mistakes will incur penalties and interest. But even honest mistakes can result in owing interest payments.
Reduce the chance of errors on your tax return. Turn to the experts at AMG Finance to ensure your taxes are filed correctly. Schedule an appointment with a tax professional at AMG Finance.
