Taxes
March 23, 2023 Hayden Adams
Watch out for these common errors when preparing your tax return.
During my eight-years at the IRS, I watched taxpayers make the same mistakes time and again. Not every error will lead to an audit, but you should take pains to be as accurate as possible—and to avoid the following oversights that can lead to heightened scrutiny by the IRS.
Red Flag #1: Underreporting income
Generally speaking, all income is taxable unless it's specifically excluded, as is the case with certain gifts and inheritances. In most instances, the income you earn will be reported to both you and the government on an information return, such as a Form 1099 or W-2. If the income you report doesn't match the IRS's records, you could face problems down the road—so be sure you include the income from all of the following forms that are applicable to your situation:
- 1099-B: The form on which financial institutions report capital gains.
- 1099-DIV: The form on which financial institutions report dividends.
- 1099-MISC: The form used to report various types of income, such as royalties, rents, and numerous other types of income.
- 1099-NEC: The form used to report payments to nonemployees, such as independent contractors.
- 1099-R:The form on which financial institutions report withdrawals from tax-advantaged retirement accounts.
- Form 1099-INT: The form on which financial institutions report interest income.
- Form SSA-1099:The form on which the Social Security Administration reports Social Security benefits (a portion of which may be taxable, depending on your level of income).
- Form W-2:The form on which employers report total annual compensation, payroll taxes, contributions to retirement accounts, and other information.
If you receive an inaccurate statement of income, immediately contact the responsible party to request a corrected form and have them resend the documents to both you and the IRS as soon as possible to avoid delaying your tax return. Also, be aware that you must report income for which there is no form, such as renting out your vacation home.
When you sell an investment, you'll need to know both thecost basis(what you paid for the investment) and the sale priceto determine your net gain or loss. The cost basis of your investment may need to be adjusted to account for commissions, fees,stock splits, or other events, which could help reduce your taxable gain or increase your net loss.
Financial institutions are required to adjust your investments' cost basis and provide that information on a Form 1099. However, brokerages aren't required to report the cost basis for investments purchased prior to a certain date, which means you'll be responsible for supplying that information (see the table below). Be sure to keep records of all investment purchases and sales—even those for which your brokerage is responsible.
Your reporting responsibility
Depending on security type and date of purchase, you—rather than your brokerage—could be responsible for reporting the cost basis of your investment to the IRS.
| Security type | Investor's responsibility if |
|---|---|
| Stocks (including real estate investment trusts) | Acquired before 01/01/2011 |
| Mutual funds, exchange-traded funds, and dividend reinvestment plans | Acquired before 01/01/2012 |
| Other specified securities, including most bonds, derivatives, and options | Acquired before 01/01/2014 |
Red Flag #3: Claiming unsupported deductions
The IRS keeps a careful eye on certain tax deductions in order to discourage abuse, particularly if the deduction is especially large or unusual, such as a big donation to a charity. Be sure to keep meticulous records to support the deductions on your tax return, and for charitable donations, verify that the government recognizes any organizationthat you donate toas a tax-exempt entity. You can confirm an organization's tax status with the IRS's "Exempt Organizations Select Check" tool.
Red Flag #4: Entering information incorrectly
Sometimes, the simplest mistakescause the biggest headaches. For example, entering the wrong Social Security or tax ID number can cause major problems in processing your return. To guard against such missteps:
- Review all numbers on your return for accuracy.
- Check that all the names on the return are spelled correctly.
- Compare this year's tax return with the last year's, and make sure that there are no unexplained differences or items that were left off.
- Double-check that you've signed and dated all relevant pages.
Using tax-preparation software can increase the overall accuracy of your return and help identify all the deductions you may be entitled to. However, even the best tax software won't catch basic inputting errors. Consider enlisting a tax professional to give your return a second look or even prepare it from start to finish.
Learn about tax-smart strategies.
Go to tax planning guide
Bonds
Not Always Tax-Free: 7 Municipal Bond Tax Traps
Although municipal bonds pay interest that is generally exempt from federal and state income taxes, it's not always free from all taxes.
Retirement
New Contribution and Gifting Limits for 2024
The new retirement contribution and gift exemption limits for 2024 allow you to direct more funds into tax-advantaged accounts and possibly reduce estate taxes.
Related topics
Taxes Tax Planning Financial Planning
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
