- Is A Tax Preparer Liable for Mistakes?
- What Happens If A Tax Preparer Makes A Mistake?
- Can I Sue A Tax Preparer?
- What To Do If Your Tax Refund Is Wrong
- Explanation en route
- Cash or hold the check?
- Documentation of the difference
- Common refund discrepancy causes
- Other debts collected from refunds
- Self-correcting your mistakes
- 5 IRS Penalties You Want to Avoid
- 11 Big Tax Mistakes to Avoid
- 1. Missing the deadline
- 2. Using the wrong Social Security number
- 3. Getting your name wrong
- 4. Forgetting to carry the one
- 5. Screwing up your bank account number
- 6. Forgetting to sign your return
- 7. Mailing your return to the wrong address
- 8. Leaving out all the backup
- 9. Making the check out to the wrong entity
- 10. Scrimping on stamps
- 11. Giving up
- 7 Common Tax Mistakes That Can Cost You Big
- 1. Getting a big refund in April.
- 2. Claiming the wrong filing status.
- 3. Missing tax deadlines.
- 4. Not claiming all your income.
- 5. Missing out on valuable deductions and credits.
- 6. Relying on outdated write-offs.
- 7. Misunderstanding how an extension works.
Is A Tax Preparer Liable for Mistakes?
If your tax preparer makes a mistake resulting in you having to pay additional taxes, penalties or interest, you have to pay these fees — not your tax preparer. Since it is your tax returns, it’s your responsibility.
When you suspect the tax preparer of misconduct that results in an IRS audit and penalties, you can report them to the IRS for misconduct or sue for damages.
What this article covers:
- What Happens If A Tax Preparer Makes A Mistake?
- Can I Sue A Tax Preparer?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Happens If A Tax Preparer Makes A Mistake?
The bad news is that even when the tax preparer makes mistakes, you must pay the penalties. If the mistake was caused by the omission of information from your end, you’re on the hook here and you’ll need to work with your tax preparer to make necessary corrections
However, if the mistake was caused by the tax preparer, you would need to notify him about the correspondence you’ve received from the IRS.
Ideally, the tax preparer should rectify the mistake by taking necessary corrective action, including filing an amended return at no extra charge, informing the IRS and compensating the taxpayer to smooth things over. But they aren’t required to do so. Check the contract you signed with the tax preparer that states their liabilities.
When there is suspected misconduct, take a different approach. You need to complete Form 14157 and submit it to the IRS with all supporting documents. If the error impacts your tax return or refund, you will need to file Form 14157-A.
According to the IRS, some instances in which you can report a tax preparer are:
- Not informing the client before filing an individual Form 1040
- Making changes in the tax return documents
- Generating a larger refund by using an incorrect filing status
- Generating a large refund by creating false exemptions or dependents
- Creating or omitting income
- Generating a large refund by creating false expenses, deductions or credits
- Misdirecting refunds
When the mistake doesn’t impact tax returns and/or refunds, you may still report the tax preparer under the following circumstances.
- Improper use of the Preparer Tax Identification Number (PTIN) on a tax return
- Not providing clients with a copy of their tax return when asked to do so
- Failing to sign tax returns they prepare and file
- Holding the client’s records until the preparation fee is paid
- Using off-the-shelf free tax software for preparing client returns
- Claiming to be a certified accountant, an attorney, an enrolled agent, enrolled retirement plan agent or enrolled actuary
If you are a tax preparer and you notice another tax return preparer committing any of the practices mentioned above, you can also report them.
It is up to you to convince IRS of the tax preparer’s negligence. You will need to show a direct relationship between the tax preparer’s mistake and the damages you suffered.
The IRS will investigate and if it finds evidence of wrongdoing, the tax preparer’s tax identification number could be rescinded.
In addition, you can report the tax preparer to the ethics committee of any professional organization that the tax preparer may belong to such as the Certified Public Accountants, NATP, American Bar Association.
Can I Sue A Tax Preparer?
Suing a tax preparer is often the last resort since the taxpayer would have to incur significant legal fees. However, if the amount in question is substantial, taking the matter to the court may provide relief from undue taxes and fees. Moreover, if the tax preparer is not registered by the IRS or state-licensed, the only recourse is legal action
You can file a standard professional malpractice complaint with the state court in your jurisdiction.
To avoid dealing with these problems, it is best to research the candidates and find one that suits your needs. For example, if you’re dealing with complex financial situations, you may need regular consultations. IRS has a website where you can find professionals with valid credentials who are up to the task.
What To Do If Your Tax Refund Is Wrong
As of April 15, the IRS has sent out almost 89 million tax refunds. The average check amount is $2,757.
In most cases, the refund amounts are just what the filers expect. But occasionally, a tax refund is wrong.
In some cases, it’s less than what was figured on the 1040. Every now and then, it’s more.
Regardless of whether the refund discrepancy goes against you or favors you, some steps can be taken to resolve the matter. That way, even if you or the tax collector aren’t necessarily satisfied with the eventual amount, you’ll at least understand the mathematical misinterpretation.
Explanation en route
First, don’t panic. There’s usually a logical explanation for why you and the IRS came up with different numbers.
The IRS will send you a written explanation for the unexpected amount. The only problem is that the explanation doesn’t always accompany the check. Such coordination of cash and comment is particularly difficult with directly deposited refunds, which are ly to show up unexplained in your account first.
- Math errors were made in computing your tax bill.
- Incorrect credit or deduction claims were made.
- Estimated tax payments were not credited properly.
- Other federal debts, such as a student loan, are collected.
Since the letter and check or direct deposit usually don’t arrive simultaneously, you can always call the IRS if you get a refund check and have questions about the amount.
The main IRS toll-free number is (800) 829-1040 or (800) 829-4059 (TDD) for the hearing impaired. You also can call or visit your local Taxpayer Assistance Center. The IRS website has an interactive locator page to help you find the nearest one.
According to experienced tax pros, the best time to call is about an hour before the IRS office is scheduled to close. Mornings usually are very busy, and during tax-filing season, you’ll probably be in for a long wait on hold at any time of the day.
Cash or hold the check?
As you’re waiting for the explanation letter to clear up the refund issue, you also have to decide what to do with the more, or less, money you received.
“It’s usually not a problem to cash it, especially if it’s a smaller difference,” says Bob D. Scharin, senior tax analyst for the Tax & Accounting business of Thomson Reuters.
In fact, if the check is less than you expected and it turns out that you were correct, once you and the IRS resolve the matter in your favor, the agency will make up the difference (plus a bit of interest if it takes more than 45 days to correct the error) and send you another check for the balance due.
If, however, the difference is larger or your refund is much more than you believe you should have received, it’s generally a good idea to hold off cashing the check or spending the money until the issue is resolved.
“Recognize that you could be asked to send it back if the amount is more than you expected,” says Scharin. That’s easier to do if you still have all the IRS’ mistakenly refunded money in hand.
Documentation of the difference
Once you get the official word on why your refund is not what you had expected, it’s time to figure out what happened.
A typical notice will show you some basic 1040 information: adjusted gross income, taxable income and total tax due. In each of these categories, the IRS will indicate what you entered and what the agency came up with. A major difference in one of these areas will pretty clearly show you where the problem lies.
The document should also note how much tax you paid and any over- or underpayment. Additional charges or credits, such as interest and penalties, also are taken into account.
“Get out your return and try to reconcile it that way,” says Scharin. If you used a tax professional to file your return, call that person for help in clearing up the matter.
In many cases, the notice will include a phone number. Scharin says a personal inquiry directly to the IRS could also help.
“You might want to call before sending documentation,” he says. “You might find in speaking with a person, any confusion is cleared up, for good or otherwise.” At least you’ll know exactly what the agency needs from you to resolve the issue.
Common refund discrepancy causes
“Most ly it is an arithmetic error,” says Scharin. In these cases, the IRS simply corrects your calculations and sends you the proper refund amount.
Even tax software doesn’t make you immune to addition and subtraction issues.
Scharin recalls one individual who “did his taxes on a computer and forgot to press ‘recompute.’ So even though he entered in everything correctly, he didn’t finish the process.”
You also might have claimed something that, your income, you’re not entitled to, says Scharin. “Income phaseouts, your adjusted gross income, affect several credits,” he says.
But it just as easily could be an IRS error.
“You may have made estimated tax payments, and one was not credited properly,” says Scharin. “From your records, you overpaid or paid properly, but the IRS doesn’t think so. So send them a copy of the canceled check.” If you paid your estimated taxes electronically, find that payment receipt and share it with Uncle Sam.
Estimated tax payments are a common culprit in divergent refund amounts. The amount of tax on the return is calculated correctly, but the filer and IRS come up with a difference on the amount of tax paid.
Other numbers that cause problems are those 9 Social Security digits. When any of those are wrong (such as transposed numbers, or they don’t match other records, perhaps involving name changes after marriage or adoption), problems with your tax return — and refund — appear.
Refund issues also crop up when names of dependents don’t match Social Security numbers. Husbands and wives have different names, as do their children.
Other debts collected from refunds
Your tax refund also might be a direct path to other money you owe.
The government can go through your federal refund to collect if you owe money to other government agencies. The most common cases involve court-ordered financial payments associated with a former marriage (e.g., delinquent child or spousal support payments) or unpaid student loans.
The IRS will even make sure it gets prior federal tax debts that you didn’t clear.
Even taxpayers who have a payment arrangement in place with the IRS could encounter refund issues. The agreement with the IRS says it can apply any refund you have against what you owe.
Self-correcting your mistakes
In a worst-case scenario, you might not even get a refund.
“You’ll get a letter telling you to refile,” says Scharin.
You also should refile your return and refigure your tax bill and any refund if you find a mistake that the IRS overlooked in processing. If the IRS does eventually notice the error, you’ll face penalties and interest on the amount you didn’t properly pay on time.
In these cases, file an amended return, Form 1040X, and send the original, incorrect refund check back to the agency. If the money was directly deposited, use it to pay your correct tax due.
Since you cannot e-file Form 1040X, the IRS says to include a letter of explanation with the returned check or corrected payment amount. The agency will issue you a refund for the proper amount when it processes your amended return.
When sending back an actual check, on the back where you normally would endorse it, write “void.” Send the check and your letter detailing why you’re sending back the check. Be sure to include your name, Social Security number, mailing address and a daytime telephone number in case an agent needs to follow up with you.
Send the check back to the issuing center; you’ll find that location on the front of the check. Before you drop it in the mail, make a copy of the check and your letter for your files. It’s a good idea to send the material with a return receipt for additional verification for your records.
You also can call the IRS’ toll-free number and ask to speak to taxpayer accounts about steps to take, especially with regard to direct-deposit refund discrepancies.
It’s no fun to return a tax refund, but by making sure you get your payment and refund records straight, you’ll know you won’t have to worry about unexpectedly hearing from the IRS in the future.
5 IRS Penalties You Want to Avoid
Careless mistakes at tax time can leave people paying more money to the IRS. Those mistakes are avoidable through awareness of and strict adherence to the tax rules, including deadlines. Learn the five most common IRS penalties and how to avoid them.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
Nobody sets out at tax time to figure out how to pay more money to the IRS. But careless mistakes can leave many people doing just that. Some IRS penalties are for very common mistakes. Those mistakes are avoidable through awareness of and strict adherence to the tax rules, including deadlines.
The first thing you must remember is the date: May 17, 2021 for the 2020 tax year. Mark it on your calendar, you may even want to circle the date in red.
Nobody s having to file their tax return, but we all know there is a deadline to file, or at least to request a tax extension. Avoid being in so much angst over taxes that you just don’t file. The IRS knows you exist and they get copies of all those W-2s and 1099s you received in the mail, so they know you made some money last year.
Late filing penalties can add 25% to your tax bill. You also must sign your return. Forgetting to sign a tax return is the most common mistake taxpayers make. The IRS won’t accept your tax return if it is not signed, and that is just the same as not filing it at all.
If you’re self-employed, and you intend to deduct all the wear and tear you put on your car last year getting the job done, it has to be done according to the new rules. You need to be accurate in your record keeping to avoid penalties.
Should your creative bookkeeping set off red flags to IRS employees, you will have to provide a journal detailing every mile you claimed on your return. You'll also have to turn over receipts for all other questions they may have on your entire tax return.
If you are unable to prove your side, there is a 25% accuracy penalty on top of the additional tax and then the interest on the entire amount.
If you’re not good at math, then you had better sharpen your skills if you are preparing your taxes by hand. Math errors are very common on pen-and-paper tax returns, so check and re-check your math.
If the math error results in you paying less tax than you should, the IRS is ly to require that you pay the additional amount of taxes owed plus interest accrued since the due date of the return.
The good news is, when you use TurboTax, we handle all the math and we guarantee that our calculations are 100% accurate.
If you run a home daycare service, use part of your home as an office, or designate a closet or other area to store inventory, you may confidently take a deduction for your home office.
The key is that you use your home office ‘exclusively and regularly’ as your principal place of business. You should only deduct the exact area(s) you use exclusively for business, so if your office doubles as a spare bedroom, you can only deduct the portion of the room used for business.
If the IRS determines the taxpayer does not qualify for the home office tax deduction, the damage can be twofold.
- First, because the deduction is taken on Schedule C, it may raise the taxpayer’s taxable income.
- Second, if the reduction in expenses leads to more income on the Schedule C, that amount is also subject to self-employment tax, which is 15.3% in most years.
They say it’s always better to give than to receive. In the case of income tax filing that is true. Charitable contributions can lead to additional tax deductions.
In donating clothing and other goods to a charitable organization, the donor must receive an itemized slip from the organization listing what has been donated and the condition of the items. There’s also a place where the person should be putting down a value and then signing the slip.
If you are selected for an audit, the deduction may be denied because there’s nothing specific listed on the slip, the condition of the items and their value. If denied, the filer will have to pay the additional taxes and perhaps a 25% accuracy penalty on top of the additional tax, and then the interest on the entire amount.
In addition, the deduction may also be denied if the charitable contribution does not meet IRS guidelines for a qualified donation or charity.
11 Big Tax Mistakes to Avoid
Mistakes are part of life, but try not to make them part of your tax return. One misstep could hold up your tax return — maybe even your refund — for weeks or months, and you might even end up on the hook for interest and penalties. Here are 11 tax mistakes you definitely want to avoid.
1. Missing the deadline
The alternative — doing nothing — opens you up to a 5% penalty on the amount due for every month or partial month your return is late. The maximum penalty is 25% of the amount due.
You’ll also owe interest on taxes outstanding after the deadline, even if you get an extension. And the IRS may hit you with a late-payment penalty, normally 0.5% per month on the outstanding tax not paid by the filing deadline. Again, the maximum penalty is 25%.
2. Using the wrong Social Security number
The IRS uses Social Security numbers to cross-reference information it receives from you with information it receives about you from your employer, bank or other entities.
Transposing a digit in your Social Security number screws that up, which means the IRS could reject your return.
So, be sure you enter every Social Security number on your tax return exactly as it appears on the Social Security card.
» MORE: Learn more about taxpayer ID numbers and how to get one
3. Getting your name wrong
This mistake is easy to make if you don’t use your full legal name every day. It creates a problem because your name on any refund check from the IRS will be spelled the way it appears on your tax return, which could raise a flag at your bank.
Be sure to spell the names of everyone on your return just as they appear on their Social Security cards, too. If you’ve changed your name, tell the Social Security Administration.
You can also call the IRS to correct the spelling of your name over the phone.
4. Forgetting to carry the one
The IRS catches tons of errors on tax returns every year, and in many cases there was more than one math error per return. These mistakes can become more ly if you’re preparing a paper return by hand. Avoid ruining your refund-fueled daydreams by using tax software or by hiring a qualified tax preparer.
5. Screwing up your bank account number
If you’re getting a refund, you’ll probably get it much faster if you choose the direct deposit option. That way it’ll go right into your bank account — unless you give the IRS the wrong account number or routing number.
6. Forgetting to sign your return
An unsigned return is an invalid return in the eyes of the IRS.
If you did everything else right, including sending in your payment, the IRS may not ding you for missing the filing deadline because of a missing signature, but you’ll ly need to respond with a signed copy to get things moving again.
And don’t forget: Anyone you paid to prepare your return has to sign and provide their IRS Preparer Tax Identification Number. If you’re filing jointly, your spouse has to sign, too.
7. Mailing your return to the wrong address
If you’re filling out a paper return, be sure you mail it to the right processing center. Often, returns that include payments go to a different place from returns that don’t have payments. Send it to the wrong center and you’re asking for a processing delay. You can find out here where your return should go. Or you can save yourself the headache and e-file.
8. Leaving out all the backup
If you’re mailing a paper return to the IRS, don’t just shove your 1040 in the envelope and call it a day.
You need to attach all required tax forms, supporting schedules and documents, such as your Schedule A if you’re itemizing and your Schedule D if you’re reporting capital gains and losses.
If you forget the backup, you might get a letter from the IRS saying your tax credits or refund are on hold until you fork over the documents. If you’re using software and filing electronically, this part is easier.
» MORE: See our picks for the year's best tax software
9. Making the check out to the wrong entity
If you owe, make the check out to the U.S. Treasury — not “Uncle Sam” or “International Rat Society.” The IRS probably won’t cash it, and then — surprise! — your payment may be late and you'll be hit with a penalty. Alternatively, you can pay online via IRS Direct Pay or use the electronic payment options in your tax software.
» MORE: See a list of other ways to get money to the IRS
10. Scrimping on stamps
Were you trying to save a few cents by using one instead of two stamps on that big, extra-stuffed envelope? Guess what? The U.S. Postal Service will send it back, possibly making your return late, which could cost you far more than 55 cents in interest and penalties. Again, avoid this nightmare by e-filing or at least confirming postage requirements with the Postal Service.
» MORE: See our complete guide on how to file taxes
11. Giving up
If you’ve made a mistake on your return, fix it — and fix it fast. Never ignore the IRS. To amend your tax return, get your hands on a Form 1040X, fill it out to fix your error, and get it to the IRS.
If the changes involve other schedules or forms, you’ll need to attach them.
And if the correction means you owe more taxes, beware: The IRS will assess interest and penalties from the original due date of those taxes.
A lot of things can go wrong at tax time, but all mistakes in life, try to learn from them. Take the time to understand your tax situation — small changes can save big money, after all.
» MORE: How to get rid of your back taxes
7 Common Tax Mistakes That Can Cost You Big
It’s once again that time of year when we brave overcrowded gyms, dry January, and of course, the start of tax season.
As you begin organizing receipts and checking the mail for your W-2, it’s also a good idea to brush up on how you maximize your tax savings. Below are some of the common mistakes taxpayers make when filing taxes and how to avoid them.
1. Getting a big refund in April.
Filing taxes can be a stressful process, but getting a big refund at the end of it all can feel a nice reward. Well, if you do get a refund each year, it’s not exactly cause for celebration. The truth is that getting a refund is bad, actually.
Why? That money isn’t a generous gift from Uncle Sam. It’s your money that you earned throughout the year, but didn’t receive until you filed your taxes. This happens if you don’t claim the correct number of exemptions on your W-4 and end up having too much tax withheld from each paycheck. And that’s money you could have used to pay off debt or socked away to collect interest.
Ideally, you should have just enough withheld from your paychecks to break even at the end of the year.
2. Claiming the wrong filing status.
Whenever you file taxes, you have to choose a status:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
“This choice determines almost everything on your tax return and is made at the beginning of the process, yet most people don’t understand the basic options available to them,” said Ryan McInnis, founder of Picnic Tax.
If you’re single with no kids, choosing the right filing status might seem obvious. But married couples, single parents and caretakers might have a tougher time choosing the right one.
For example, McInnis said most married couples choose “married filing jointly,” even though there are many situations when this isn’t the optimal choice.
“Say you or your spouse have a large amount of out-of-pocket medical expenses and one spouse has a much higher gross income than the other spouse.
Because you aren’t able to deduct medical expenses until they exceed 10% of gross income, it may be better to file separately so that the spouse with the lower income can deduct the medical expenses on their own return,” he said.
There are countless other examples, too. For instance, single parents who have a qualifying dependent and pay for more than half the total cost of running the household may qualify to file as “head of household,” which increases the standard deduction. You can also be considered unmarried if your spouse didn’t live with you for the last six months of the year.
3. Missing tax deadlines.
It might seem silly, but sending in tax returns late is one of the biggest mistakes taxpayers make.
“With the increasing popularity of e-filing, many people wait until the last minute to submit their returns and don’t complete their email transmission until after the 11:59 p.m.
deadline on April 15 (or October 15, if they are on extension),” said Gary Scheer, a registered financial consultant, certified senior advisor, author and speaker.
It’s always a good idea to give yourself more time than you think you’ll need to file, just in case any last-minute issues come up. And if you send your return by mail, Scheer recommends sending your documents by certified mail with registered receipt requested.
If you are a freelancer, contract worker or business owner, you especially need to pay attention to important tax deadlines throughout the year.
“By far, the most common mistake I see is people failing to make estimated income tax payments and then getting assessed the failure to pay and sometimes even failure to file penalties by both the IRS and their state taxing authority,” said George Birrell, a certified public accountant and founder of Taxhub.
The good news is this penalty is waived for certain taxpayers: those who owe less than $1,000 in taxes after subtracting their withholdings and credits, or those who paid at least 90% of the tax owed for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
4. Not claiming all your income.
You know you need to report the income you earned through your job, though you may wonder if you really need to include other small earnings, too. Though it might not seem a big deal to leave out a check or two from your income for the year, it’s not a good idea.
“Every statement of income you get in the mail at tax time also gets sent to the IRS,” explained Andy Panko, an enrolled agent and owner and financial planner at Tenon Financial LLC. “Whether you intentionally or mistakenly leave off one of the items of income, the IRS will pretty easily catch it and eventually request it from you.”
Depending on the amount of the missing income and the length of time it takes for the IRS to catch it, you could owe a sizeable amount in underpayment penalties, late payment penalties and interest, Panko said. Sure, there’s a chance you’re never caught, but it that’s a potentially expensive risk to take.
5. Missing out on valuable deductions and credits.
You don’t necessarily need to hire a professional to do your taxes, but if you take the DIY route, be sure you’re fully aware of the tax credits and deductions available. One in five tax filers who prepare their own returns miss out on an average of $460 in write-offs, for a collective $1 billion each year, according to H&R Block.
A few commonly missed deductions, according to Panko, include those for medical expenses, teachers’ classroom supplies, business use of your home and property damage caused by federally-declared disasters. Common credits that get missed are child and dependent care credits, credits for higher education expenses and the earned income credit for those with incomes below a certain level.
“The U.S. tax code is incredibly convoluted, and therefore, it’s difficult to know what you don’t know. As such, it’s generally a good idea to either do your taxes using professional software or have them done by a credentialed tax return preparer,” Panko said.
6. Relying on outdated write-offs.
On the flip side, you might be more inclined to spend money assuming you’ll be able to write off the expenses at tax time.
However, with major changes that were made to our tax code in 2017, many of those write-offs may no longer exist, especially for self-employed taxpayers.
“Because these are fairly recent changes, taxpayers can overlook this and spend more in ways that will no longer benefit them, said Stephanie Hammell, a wealth advisor at LPL Financial.
For example, entertainment expenses are no longer deductible at all, though meals during entertainment events are still tax deductible.
“But if you’re planning to take out clients to an impressive dinner, weigh out the tax implications first …
there’s now only a 50% deduction available, and this is only if the self-employed individual is present during that time and that impressive dinner isn’t too extravagant,” Hammell said.
7. Misunderstanding how an extension works.
If you’re running short on time during tax time and need to file an extension, you’re welcome to do so. However, an extension only grants you more time to submit your tax return, not more time to pay up.
“If you file for an extension, you are supposed to send payment for what you may possibly owe,” said Daniel Slagle, a certified financial planner who co-owns Fyooz Financial Planning with his wife. “If you don’t, you may owe additional penalties and interest.” So be sure to have that cash handy come April 15, even if you don’t officially file until October.