DIY tax filers take a big risk
Mindlessly plugging numbers into tax software or an online tax site might seem like a quick-and-easy way to get your taxes done. But some days that approach can lead to a disaster. Just ask someone who has been audited or an accountant who later spotted costly mistakes.
One accountant tells the story of a well-to-do taxpayer who was referred to his office on another issue.
James Jenkins, president of Jenkins in Southfield, Mich., reviewed the man's previous returns and had to ask why someone making more than a half-million dollars a year was so short on cash that he felt compelled to tap into his IRA. Why did he take all that money out of the retirement account, creating a bigger tax bill?
The man said he didn't withdraw money. He rolled a large amount of money over from one IRA into another.
The man, who'd prepared his own return using tax software, ended up paying thousands of tax dollars on what was a non-taxable IRA rollover. Fortunately, that mix-up was later corrected by amending the returns -—once the accountant spotted the problem.
It's tempting to be a tax-time do-it-yourselfer, particularly when it can cost $300 or more for many people to get their taxes prepared by someone else. About 30 percent of tax returns that were electronically filed nationwide through June were self-prepared, according to the Internal Revenue Service.
But there are pitfalls out there. Here are a few:
• Bad typing. “One of the biggest mistakes I see is incorrectly inputting data by transposing numbers, omitting digits, or just making typing mistakes,” said Barbara Weltman, author of “J.K. Lasser's 1,001 Deductions and Tax Breaks 2013.”
If the Form 1099 reports that you received $946 of interest but you enter $649, she said, the IRS computer could pick up the mistake and trigger a notice. It's unlikely your entire return would be audited but it could mean headaches.
• Banking on tax software to save you. Someone who pays a tax preparer or accountant is going to have another pair of eyes reviewing receipts and the return, said Mark Luscombe, principal analyst for CCH, a Wolters Kluwer business.
“You have to have documentation to support anything you put on your return in case you're audited,” Luscombe said.
It's not smart to report that expenses and deductions were exactly the same year after year.
Jenkins said CPAs jokingly call TurboTax “TroubleTax.” Many people with simple, plain vanilla returns, he said, can successfully use tax software. But “if you get into an area you don't understand, it could be big trouble,” Jenkins said.
• Discarding or losing a 1099. George W. Smith IV, a certified public accountant and partner at George W. Smith in Southfield, said problems can arise when people receive IRS form 1099-R for direct rollover distributions from their employers' plan to their IRA or from one IRA to another.
“They don't tell us about the rollover or give us a copy of the 1099-R because it's a non-taxable event,” Smith said.
“True. But you still have to report it on your 1040 as such or the IRS will assume it's fully taxable and subject to the 10 percent early withdrawal penalty if you're under age 59 1⁄2.”
Susan Tompor is the personal finance columnist for the Detroit Free Press.