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10 Little Mistakes That Can Cause You Big Troubles with the IRS

Nov 15, 2004

10 Little Mistakes That Can Cause You Big Troubles with the IRS

Martin S. Kaplan, CPA

Special from Tax Hotline

Simple tax paperwork mistakes can cause big problems. Fixing them can cost time, aggravation, and advisers' fees -- and maybe extra tax as well. Simple mistakes to avoid...

Check-writing snags. Any check sent to the IRS that doesn't state on its face exactly for what and for whom it is written may be lost or misapplied.

Important: On each check, write your Social Security number (and, if married, that of your spouse), the number of the tax form that the check accompanies, and the tax period for which the payment is made (such as "Form 1040-ES, 2nd quarter" for a personal estimated payment). If it is a business payment, write the Employer Identification Number.

Trap: If a payment isn't designated to a specific tax and period, the IRS can apply it any way it chooses. If you owe more than one tax liability -- perhaps because you have an ongoing tax dispute or run a business that pays several different types of tax -- the IRS may apply the payment in a way that maximizes your liability.

Proof of filing not established. For every time-sensitive form, keep proof of timely filing, such as a certified mail receipt. Do this not just for tax returns but for all important filings.

Example: A self-employed individual filed for a second extension, using regular mail, by dropping off the form in a post office on the deadline date of August 15, 2003 -- just before the Northeast blackout hit. Due to the blackout, the extension wasn't postmarked on that date and was received by the IRS late. The IRS rejected the extension, added late-filing penalties and said the individual's retirement plan contributions made after August 15 for the prior year were improper.

The individual finally got the extension accepted by going to IRS Appeals, but the process took months with potential big penalties looming -- all of which he could have avoided by simply getting a certified mail receipt from the post office.

Form 1099s don't match the tax return. If you receive a Form 1099 reporting that an amount of income was paid to you, the IRS will expect to find that income on your tax return.

Snag: Sometimes such an amount isn't income to you -- a 1099 may be erroneous, or may report a check sent to you at year-end that you did not receive until after the start of the following year.

Mistake: If you don't report the income, IRS computers will flag your return and the IRS will contact you to find out why you didn't.

Better: Ask the income payer to issue a corrected version of any erroneous 1099. Otherwise, report the 1099 amount on your return so the IRS sees it, then subtract a correcting amount, adding a note of explanation. Keep records of what you did so you can explain it to the IRS with minimum trouble if it contacts you.

Not filing Form 1099-R to document withholding from retirement plan distributions. If you take a distribution from a retirement plan, tax normally will be withheld from it at a 20% rate. For pension distributions and Social Security benefits, you can elect to have tax withheld from payments.

Snag: Normally 1099s don't have to be filed with your tax return, but a Form 1099-R issued by a retirement plan that reports withholding must be filed with your return (as a W-2 is) -- the IRS will want to see it before giving credit for the withheld tax. If it isn't filed, your return will be flagged.

Important: Examine 1099-Rs issued by retirement plans. Otherwise, you may not remember the withholding, or it may occur by mistake -- and if you aren't aware of it, you may fail to take credit for it. If you overpay your taxes, the IRS is a lot less likely to contact you than if you underpay.

Inadequate charitable contribution documentation. People commonly forget documentation rules for noncash charitable contributions. When such a contribution exceeds $500, Form 8283, Noncash Charitable Contributions, must be filed with the return. If a contribution exceeds $5,000, there must be an appraisal, too.

In addition, gifts of all kinds (including by cash and check) of $250 or more must be documented by an acknowledgment letter from the charity. The letter need not be filed with the tax return but must be obtained by the time the return is filed. Otherwise the deduction can be disallowed on audit -- even for a donation that was perfectly legitimate.

Name change upon marriage or divorce not matching Social Security number. A name change upon marriage or divorce can cause the name to no longer match the individual's Social Security number, with the result that tax payments get miscredited.

Safety: Promptly report a name change to the Social Security Administration (SSA) by filing Form SS-5, Social Security Administration Application for a Social Security Card, at its local office, or call 800-772-1213 for instructions on how to report a name change by mail. The SSA will inform the IRS. Since that can take time, include maiden and marital name on the first postmarriage or postdivorce tax return filed.

Example: If Ms. Jane Jones marries Mr. Smith, she can file her first return as Jane Jones Smith.

Omitting Social Security and taxpayer ID numbers. To claim...

Dependency exemption for any individual -- you must report that person's Social Security number. This rule now includes newborn children.

Alimony deduction -- you must report the Social Security number of the person receiving the alimony payments.

Dependent care credit -- you must report the Social Security number of the person, or taxpayer ID number of the entity, paid to provide the care.

Omitting these numbers will cause the disallowance of the items until you provide them.

Multiple filings in the same envelope. If you must make two or more separate filings with the IRS, don't mail them in the same envelope. If you do, there's a good chance that whoever opens it at the IRS will process only one of the filings while thinking the other is just some sort of unnecessary supporting material, ignoring it.

Send each filing in its own envelope with its own separate certified mail receipt if proof of filing may be necessary.
First Printed: September 1, 2004
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Tax Hotline interviewed Martin S. Kaplan, CPA, New York City. He is a frequent guest speaker at insurance, banking, and financial-planning seminars and is author of What the IRS Doesn't Want You to Know (Wiley).