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The biggest tax mistakes
5 Tips: You can avoid common tax-filing mistakes.
April 13, 2005: 3:28 PM EDT
By Gerri Willis, CNN/Money contributing columnist
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CNN's Gerri Willis reports on the biggest mistakes taxpayers make.
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NEW YORK (CNN/Money) - It's that time of year: Tax Time. And if you haven't filed your return by now, you are (hate to say it), pretty strapped for time. The deadline is in two days.

Deep breath.

Before you freak out that you can't get it done, take long-time Mom Gretchen Henry's advice and "Put your life in a box and take one thing out at a time." Take out the receipts, your W-2, and your bank statements...but don't take out that No. 2 pencil -- that's mistake No. 1.

In order to get your taxes done right and on time, you need to avoid the biggest mistakes taxpayers make. Listen up to today's five tips.

Mistake #1: Not e-filing.

No pencil? No paper? Yes, this is still tax time. It's also time you get online. Join the other half of filers that go by another name: e-filers. Anthony Burke, a spokesperson at the IRS, says that not e-filing is the biggest mistake that taxpayers make. When you e-file, you can get your refund in half the time it takes a paper return. And you are less likely to make mistakes.

Burke says of the 20 million paper returns the IRS had received as of March 25th, about a million had mistakes. Meanwhile, of the 44 million returns received electronically by that day, only about 30,000 had errors.

All taxpayers can e-file their taxes for free. Check out the IRS's Free File program at www.IRS.gov/efile. You can also go to that Web site for a list of Web sites, software and tax professionals that offer e-file.

Mistake #2: Being careless.

So what are these big mistakes that people make on their returns? Burke says that wrong social security numbers is one of the most common errors. Some filers pull the wrong number from the tax tables. And others incorrectly calculate the earned income tax credit, their capital gains or losses, or the taxable portion of their social security benefits.

All of these are either an input error or a calculation mistake. Both of which, Burke says can be prevented by e-filing. For one, if you enter the wrong social security number, the system rejects the filing. And since e-filing automatically crunches the numbers for you, your calculations will be on target.

If you did goof on your paper filing, Burke says the IRS can fix most of the simple errors for you at its service centers. If they need clarification on a mistake you made, they will contact you. However, keep in mind that mistakes will likely delay your refund.

Mistake #3: Shorting Uncle Sam.

Oops. While you filed on time, you still made a mistake in your math and you actually owe more than you sent in with your return. What's the penalty? Will it hurt?

The IRS will bill you for that amount plus a minimal penalty of 0.5 percent per month, plus interest (rates are currently at 6 percent). If you substantially understate your income tax, you could pay up to a 20 percent penalty.

If you find that you shorted Uncle Sam, don't wait for the bill -- file an amended return. Check out Form 1040-X on the IRS Web site.

Mistake #4: Skipping direct deposit.

Here's a statistic for you: Three-quarters of all taxpayers will get refunds this year. Think about how many checks that is. Millions. All have to be printed, placed in envelopes, mailed, and delivered just for you to take them straight to the bank.

Take the direct deposit option. According to Burke, you'll get your refund a full week earlier than if you had the check -- regardless of whether you are filing an electronic return or a paper return.

Mistake #5: Raising red flags.

When we asked the IRS for who's a likely target for an audit, they didn't really want to reveal their secrets.

"Well, we generally don't talk about how we pick returns for auditing, however more complex returns are audited at a greater percentage than very simple returns," says Burke.

That doesn't mean you should be wary taking all the deductions you're due.

"If you claim the deductions that you're entitled to, and file an honest return, then even if you're audited, that shouldn't change," says Burke.

The bonus to being audited (yes, a bonus) is that sometimes the IRS discovers some taxpayers are due even bigger refunds. Last year, about one million returns were audited -- some 36,000 resulted in returns worth $548 million. Those taxpayers never would have seen those refunds, an average of $15,000, had they not been audited. So it's not always so bad.


Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.  Top of page

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