Common Tax Return Mistakes and How to Resolve Them: Insights from Tax Expert

Tax day is approaching, and we are here to clarify the most common issues taxpayers may face when dealing with the IRS. How to get a tax return? What mistakes do people typically make when filing taxes? How much money can individuals expect to receive back? 

We had an insightful discussion with Eva Rosenberg, the founder of TaxMama, to help consumers find answers to the key questions they might want to consider in their tax preparation. With over 20 years of experience in the field, Eva is an expert in solving tax issues. She has also authored several books and ebooks, including "Small Business Taxes Made Easy."

• Why to file taxes every year?
• What if you don't file for tax return?
• Common mistakes when filing taxes
• IRS audit penalty: statistics and advice
• What is an earned income tax credit?
• Tax fraud and personal data verification
• How to correct a mistake after tax submission
• ID.me and IRS

About Eva Rosenberg and TaxMama

Eva: My name is Eva Rosenberg. I am an enrolled agent. And one of the things that I have been doing is fighting for people's rights with the IRS for probably the last 30 plus years. And what my main business is right now is I teach tax professionals to get a very special IRS credential that lets them help you solve your tax problems. In the meantime, for over 20 years, I have been answering questions and helping people as a community service at taxmama.com.

Why File Taxes Every Year?

Michael: IRS and the government, have all the data that they need to file a regular person's tax return. They have bank information, they have W2 information, they have 1099 information. Why does a regular taxpayer need to go through it every year?

Eva: I think in some countries like Germany, they don't have to do that because the government already has that information. And it's an excellent question, but because our system is relatively complicated and people can take advantage of other benefits. Like one of the things, you're going to want to know more about earned income tax credits, refundable credits, certain kinds of deductions. Even the ordinary person probably should be preparing and filing a tax return. The other thing that TaxMama recommends on a regular basis, whether you need to or not, even if you're a senior citizen just getting social security, file a tax return.

When you file the return, the IRS and the state only have three or four years to add additional assessments or taxes or to audit. If you don't file the return, they can audit you and assess you forever. And sometimes that's why people come to me 10 years later and the state is coming to them and say, "You didn't file." And now they don't have proof that they didn't need to file. It costs nothing to file a tax return. Literally, you can go to the IRS free file sites, or you can go to VITA or TCE site tax consulting for the elderly site and have live people do it for you for free. There's no excuse to not file.

What if You Don't File for Tax Return?

Michael: Thank you. Let me go back to this. You mentioned something really interesting. So the law says if you file tax returns, this is a three-year look-back period for the IRS, and if you do not file, there is no filing?

Eva: Forever. And the states usually add an extra couple of years because they get the recordings and information from the IRS. But here is the corollary to that Michael, if you don't file a tax return within three years of the due date and you have refunds coming, so you're not filing because you know you don't owe anything, you're not going to get those refunds back.

That happens all the time. And I had one woman come to me and she had over $100,000 worth of refunds the IRS wasn't giving her. And I actually managed to get that back for her. There are ways to work the system if you know your way around the system to get around some of the rules, but I don't recommend it. Okay. I really recommend if you have refunds coming, do not leave them alone. File the stupid tax return and get your money.

The Most Common Mistakes People Make When Filing Taxes

Eva: Oh my God, there are so many. First of all, when it comes to children or dependents, they don't really understand who is qualified to be a dependent. And we have so many people in these mixed-up relationships, they're living with somebody, not exactly their child, the other person's child, the person who is doing the supporting is not related. So when it comes to children in regular relationships, divorce relationships, or whatever, I think that's one of the biggest issues.

The other is using tax software without really understanding how the software works and they're putting things into the wrong places and not putting things where they should go.

And the huge biggest thing is filing too early. People are filing as soon as they get that W2, they send it off with their electronic filed return and then two weeks later they get all this other stuff that they weren't paying attention to 1099, other W2 and things that they forgot to include. And please do not file early, review last year's information and look at what you did this year. I don't understand how somebody can forget that they had over $100,000 in income from a freelance job. And literally, that kind of thing happens. And the other thing is...

...under no circumstances file on paper, file everything electronically, pay electronically, do not pay with a paper check.

There are still people who paid last April with a paper check that haven't had it attached to their accounts. And people who filed tax returns or amended returns on paper last year, IRS still has about nine million of those unprocessed.

IRS Audit Penalty: Statistics and Advice

Michael: What is the average size of the audit penalty?

Eva: Actually, the IRS has statistics. So if you go to Google and type in irs.gov and statistics, the IRS has a data book and you can actually find all of the statistics of how much money they collect, the audits that they do, the results of the audits, the results of the audits for different income levels, for different businesses and so forth.

I'm going to tell you a little secret about people that file tax returns in good faith that aren't deliberately lying or hiding information or deliberately making up numbers. I have always been able to convince the IRS to waive the penalties for inaccuracy. You can't do much with late filing, they filed late, but pretty much any other audit-related penalty. If somebody has been acting in good faith, I've always managed to convince the IRS to waive the penalty.

The auditors and the examiners have a lot of power. And if you treat them well, the big secret to doing your own audit is treat the IRS well, do not be rude to them.

You think they're the bad guy, but they are the ones who can make your life easier. Be nice to people. Always be nice to people. It never hurts.

What Is an Earned Income Tax Credit?

Eva: For the people who are entitled to get it, this is fabulous. This is free money from the IRS. There's a little tiny bit of a credit for people who have no children. And their income is under something like $20,000. But for people with children, they can get an earned income credit of up to about $6,700 even if they pay nothing. 

And there are some changes that affect the tax return this year, which is kind of good. It used to be that if you file a tax return and your income shows investment income of $3,700 or $3750, you would lose the earning income credit entirely. And there are a lot of people who file their tax returns and they don't want to file a separate return for the child. And the child has some dividends or interest because grandma opened an account for them or something. And that income on the parents' return could cost them that earned income credit. Okay.

So this year that number has gone up to $10,000. So now it's probably okay to include the child's tax return, the child's dividend income with yours. In the past, it was not a good idea. Now let me tell you something else about the earned income credit, the child tax credit this year, also the credit for child independent care, and the American Opportunity Credit, the education credit. These credits are what's called refundable credits. 

The IRS is going to give you back the money, even if you put nothing in. And so for instance, the child tax credit might give somebody $10,000. The earned income credit might make it another six. The child’s independent credit might make it another three or four. 

People can get back almost $20,000 from the IRS without paying anything in.

Tax Fraud and Personal Data Verification

Eva: Now think about that, how tempting that is for tax fraud, very tempting for tax fraud. 

Over the years, a lot of people have filed fraudulent returns. And so every tax return that has these kinds of credits on it gets sidetracked to the IRS's Criminal Investigation Division to verify that the taxpayer is real, that the income is real, that the children and dependents are really theirs. 

So some of those refunds can take an extra six months to be released. And very often the IRS will send out a letter to the taxpayer and ask for verification of some of this information. And one of the problems last year was you had to answer by paper mail, which means the IRS didn't know they got it and wasn't associating with the account and the response time expired and people weren't getting their refunds.

One of the things that a number of tax professional organizations have written to the IRS, Treasury, Senate and the house of representatives is to beg the IRS to provide a way for us to respond online, through email, set up a separate link where we can log in and do these kinds of responses and they haven't quite gotten there.

How to Correct a Mistake After Tax Submission?

Michael: What happens if the person submits incorrectly? How can a regular person correct a mistake if they realize they made it?

Eva: Okay, some of them are easy. Okay. So maybe you didn't include a W2 or 1099. If you do nothing, the IRS is going to send you a letter and they're going to... It's called a CP2000 letter. CP is a computer program, 2000 letters. It's going to tell you, "We see that you have some missing information. You're missing 3000 here, a little bit there. If this is correct, this is how much you're going to owe, pay it." Those things will not generally have penalties if that comes up. So if you really did omit those things, just wait a little bit and take care of it. But if you have some serious problems, wait for your tax return to be processed.

And if you are filing before April 15th, what you can do is file something called a superseded return that actually replaces the original return. The only problem with that is it has to be filed on paper so the IRS won't get it in time. They won't know they have it and so forth. I mean in the past world, we could do that. So now what you need to do is wait for the return to be processed and file an amended return. And what I would do is I would recommend that if there's a problem, put the tax return on extension, because that's going to give you till October 15th to submit that amended return as though it's still part of the current year. So everything's still kind of fine. And I think that you can submit it electronically through the tax software companies. I know that tax professionals can do that, but I'm not positive.

I think TurboTax and H&R Block have the capability to submit an electronic amended return. And I would recommend that be done.

And if there's a really big error and it's overwhelming, I would say go to a tax professional who is either an enrolled agent, a CPA or a tax attorney. These are the three categories of tax professionals who generally know what they're doing and how to help you. 

How Do ID.me and IRS Work Together?

Eva: You were asking something, you were interested in the whole ID.me thing and the new IRS taxpayer account, the online taxpayer account.

Michael: Yes. Can you talk about that?

Eva: I really would like to, because it's so important for people to be able to log in and get into their accounts. And this last year, IRS started using this ID.me as a recognition tool so that they can identify people who overcome a problem they had in the past. The problem in the past was when someone tried to set up an account if they never filed a tax return for the last three years, they didn't have the prior years adjusted gross income to use and the IRS had nothing to cross-reference who they are and that they really are the legitimate taxpayer. So that made it impossible for the very people we need to help the very people who are in trouble and need to look into their accounts. They can't because they don't have any recent history.

And also for seniors or people who don't actually have credit cards, because a lot of this would be cross-referenced with the credit agencies to verify that they're real people and a lot of seniors or people, lower-income people don't have credit cards, don't have credit agencies. And it also had to get tied to your own cell phone. The text would go to your cell phone to give you the activation and it had to be in your name. So if you had an account that was a family account, or if you had one of those phones that you had to just reload every month, you couldn't get into the IRS system at all.

So they went and looked around and found this ID.me thing that lets you identify yourself and maybe even use some facial recognition and submit some documents. And so for a lot of these people who could get into their online account, many more people were now able to get in. So of course, anytime anyone does anything good people find the bad part of it. And yes, there are issues with facial recognition. And I really have to say that people who keep complaining about everything, ruin it for the people who are trying to do things in good faith.

Smooth Tax Return Experience 

While filing taxes may present difficulties, with insights from our tax expert, you can confidently navigate the process. By taking these steps, you can reduce stress, maximize your tax benefits, and ensure compliance with IRS regulations. Even if you are not required to file a tax return, you can still get a refund if you qualify for certain tax credits. 

Feel free to share your thoughts in the comments or leave a review on our website. For more expert tips, subscribe to our YouTube channel.