If your eyes are straining from rolling too much, we suggest you simply bookmark this page for the final seconds prior to your sending off for your return. Why?

The IRS charges 6% interest and up to a 20% penalty for incorrect filings. A double-check can save you tons of time, and possibly, tons of money.

• Did you include your W-2?

Obviously this won’t be a problem for e-filings, but for our snailmail brothers and sisters, it’s one of the most-repeated mistakes.



• Did you write the correct social security number?

Go over your return and see if you didn’t forget a digit, or mix your wife’s with your own. It’s a silly mistake that can cost you time or money (or both), and the IRS says it’s the number-one “whoops” mistake.

• Did you file under the correct status?

Easy to slip up on this one if you’re recently married or separated. Same level of “whoops” in the IRS mistake list.

• Did you claim new home credits too early?

You must have closed escrow by January 1, 2010. Anything after that has to wait for next year. Sorry.

• Did you report all your income?

No problem for anyone who’s worked at the same job for umpteen years, but if you’ve been floating about doing work for multiple employers (or, gulp, a now-defunct business), it can be tough to keep track of all the W-2s you’re owed.

• Did you report all your charitable giving?

If you’re just starting now, it’s a little late, but make sure you keep receipts for anything and everything you give away to charitable organizations. Anything valued over $200 has to have a corresponding receipt. If the IRS comes-a-auditing, be prepared to whip out your receipt logs, or you’ll have an uncomfortable amount of ‘splainin’ to do.

• Did you report all your mileage?

Same as your charitable giving, above. Make sure you keep an immaculate log. Again, the IRS expects you to keep your records for at least five years, and they’ll expect you to have those records ready for display whenever they’d like a closer look.

• Are you sure your “dependent” is actually a dependent?

Visit the IRS’s website and make darn sure your hanger-on qualifies as a dependent.

If this list saves just one person a week’s worth of waiting for a much-needed return, then our post will have been worth the effort!

The Schedule M form is for anyone needing to account for the Making Work Pay credit or retirees who got the free $250 from the government last year. The Making Work Pay credit comes from the February 2009 stimulus package, which stated that working taxpayers can get up to a $400 benefit.

This benefit was automatically adjusted in the witholdings of most Americans’ paychecks; your “benefit” should’ve resulted in a slight increase in your take-home pay. If you’re a self-employed employee, however, you likely didn’t see a dime of it. You’ll need to file a schedule M, and there’ve been more than a few mistakes.

Apparently, lines 10 and 11 are tripping up filers. Seems to be some confusion with the yes/no check box telling the IRS if you received the check, then the following line to put in the total amount received.

The solution is pretty simple:

• If you check “yes, I received a check,” then you must put in the amount received in the correct line.
• If you check “no, I didn’t receive the check,” then for goodness sakes, don’t put an amount in the line.

Both errors get your return shipped to the Error Resolution System, where it’ll languish waiting for someone to realize it was a simple mistake. This can add weeks to your return. Double-check your return and consider using an electronic filing system, as those flag errors in your filing. A misplaced checkmark or an extra “0” where there shouldn’t be can mean the difference between a prompt, juicy tax check and hours on the phone with an IRS representative. Ouch.

Question? Call the IRS toll-free at 1-800-772-1213.

Via Phillip on Flickr.

Getting information from Swiss banks: even when they aren’t in Switzerland, these banks are feeling the heat. It may be the single best way to make up for a weak 2008 tax return: collect unpaid taxes on money earned during the good years, instead!

Legalizing in order to tax: The Washington Post recently published an editorial calling for legalizing and taxing drugs. For a paper that values its connections to the political mainstream, that’s a significant step. Among other things, they argue that it’s a dollars-and-cents issue:

Having fought the war on drugs, we know that ending the drug war is the right thing to do — for all of us, especially taxpayers. While the financial benefits of drug legalization are not our main concern, they are substantial. In a July referendum, Oakland, Calif., voted to tax drug sales by a 4-to-1 margin. Harvard economist Jeffrey Miron estimates that ending the drug war would save $44 billion annually, with taxes bringing in an additional $33 billion.

Finding new things to illegalize and fine: High-Frequency Trading is a fiendishly complex subject which is only partly understood, even by PhDs and industry experts. Fortunately, the qualifications for having an opinion on it are a bit lower. One new proposal is a tax on every trade as a way to partly ban high-frequency trading.

So that’s the plan: tax money overseas, legalize drugs, and create a fine for something nobody really understands.

How much of this will really happen? The answer is, likely, almost none of it: overseas banks have always had to assume that there could be a crackdown, so they’ve taken precautions to make it hard to get money out. While drug legalization is getting more popular, it’s hard to beat the status quo. And a trading tax is not likely to get passed any time soon—if Wall Streeters are already paying income taxes, why kill the golden goose by cutting their incomes in order to tax them a different way?

The most effective way to do that? Give different taxpayers different ways to file — big corporations like GE may file a 40,000-page tax return, while an individual might file a 1040-EZ. But are these “easy” tax returns easy enough?

Photo credit: striatic on Flickr.

The 1040-EZ, originally released in 1982, was designed to be the easiest of easy tax returns. And it is easier than the standard tax forms — it excludes anyone who is claiming dependents, earning $100,000 or over age 65. And it doesn’t allow any tax credits besides the Earned Income Tax Credit.

For many tax payers, that’s simple enough — but it’s not an easy tradeoff to make. After all, giving up education credits, the child tax credit, and the saver’s tax credit are all tax credits that lower-income taxpayers could take, but that wouldn’t be available to someone filling out a simple form.

Instead of having easy forms, the it’s a safer decision to make it easy to prepare them. Taxpayers shouldn’t spend hours figuring out their eligibility for a tax credit that’s not going to end up making them much money in the end. Instead, the simplest technique is to do as much as possible automatically. Automated, online filing can give taxpayers access to tax credits they could take advantage of, without forcing them to waste time on the ones that aren’t worth it.

It doesn’t make sense to just focus on the forms. Easy tax returns don’t come from shorter forms — they come from easy ones! That’s why RapidTax always makes it as easy as possible to file taxes online.

So what is the IRS trying to add here?

This is all part of their efforts to make there there are quality tax preparers available to all taxpayers. Instead of just declaring certain preparers qualified (or having them all take a standardized test), the IRS is asking regular taxpayers for their ideas.

This is going to give people a chance to articulate why they pick whoever they pick, which means that the IRS will be able to focus on qualitative issues: some people might excel at quickly preparing tax returns — but others might be great at making sure taxpayers don’t get overwhelmed my all the rules and regulations (not to mention fines and fees).

This IRS is looking for input from two groups:

Consumer groups (and regular consumers):

These groups include the AARP, Consumer Federation of America, Center on Budget and Policy Priorities, National Community Tax Coalition and Low Income Tax Clinics.

Industry groups (and tax preparers):

…including the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals and the National Society of Accountants.

So what if you’d like to attend? Just send them an email:

CL.NPL.Communications@irs.gov

1. Small business gets a break. Even though the IRS has tried to be kinder and gentler, they’ve still cracked down on companies that don’t pay their payroll taxes. They’re going to back down.

2. They’re going to work on getting people their tax credits faster. No more waiting for the housing tax credit!

3. Bad news? They’re also worried about tax credit fraud.

4. The IRS is going after people who don’t file — to make sure they get tax credits even if they don’t have to file their taxes!

5. The IRS wants to get W-2’s and 1099’s earlier in the year. Right now, it can take months after filing to find out about an error. They’d like to make sure it happens faster.

6. They’re going to try especially hard not to give poorer tax payers a refund, and then take it back.

7. The taxpayer advocate is keeping busy! With more and more people needing help with their finances, the advocates are helping to negotiate with the IRS and advise taxpayers on their options.

8. Partial payment installment plans could make a big comeback. For taxpayers who can’t afford their entire debt, this option has long been just out of reach. But it’s a great way to settle back taxes and help taxpayers (and the IRS) move on.

9. They’re planning on simplifying the tax law. But if it takes 131 pages to tell Congress what taxpayers want, and “make things less complicated!” gets one paragraph of that, the odds can’t be too high.

There’s lots of room for improvement, but it’s always good to see someone speaking up for the average taxpayer. Hopefully this will

You can read the whole taxpayer advocate’s report to Congress online. Peter Pappas has a more cynical take.

Criteria for Claimin a Dependent

Straight from the IRS website, here are the rules for claiming a dependent:

1. **Relationship** — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.

2. **Residence** — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.

3. **Age** — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.

4. **Support** — did not provide more than one-half of his/her own support for the year.

If you can demostrate that the dependent fits these criteria for you (and thus no one else), write up the reasons and mail them in with your tax return.

The IRS can’t tell you who else has claimed the dependent, for several reasons: one is that since they don’t know who made the right claim, they don’t want to violate the privacy of someone who really is claiming their own child. Another is that there’s always the potential for mistakes, and it doesn’t make much sense to punish someone for accidentally writing a “4″ that looks like a “9″ when copying a social security number.

Why Dependents Require a Social Security Number

For a while, this wasn’t the problem: the IRS used to more or less take the taxpayer’s word for it when they claimed dependents. But in 1987, the rule changed to require taxpayers to give a social security number for every dependent they claimed. And suddenly, seven million dependents disappeared. Many of them were probably due to misunderstandings: two divorced parents each claiming all of their kids, for example. But others could have been due to shady behavior, including claiming children while knowing someone else would claim them, or even fabricating dependents entirely.

Contesting a Claim, in Short

Prepare your filing the way you normally would, but instead of e-filing, print it out. Write up a cover letter, covering how your dependent claim satisfies the criteria of relationship, residence, age, and support, and then mail the letter and the filing to the IRS. In most cases, that will settle things. If not, the IRS will audit you and the other person, at which point it makes sense to begin working with a tax attorney who can guide you through the rest of the process.

This is actually a fairly bad precedent to establish. It’s clear that cell phones are a benefit, and that as such it wouldn’t make sense for them not to be taxed. If they were tax free, we’d end up with a situation similar to healthcare: it’s much more economical to buy healthcare through an employer than as a private party. This means that someone who loses their job also loses their access to healthcare. Treating cell phones this way could make things even worse: a newly laid-off employee could lose health insurance and the ability to call new potential employers.

The interesting question is: why wasn’t this law enforced in the first place? According to the Wall Street Journal:

The request is a turnabout from last week, when IRS proposed measures to improve enforcement of the law, which is now widely ignored by employers and employees. One option proposed by IRS would have counted 25% of employee cell phone use as personal, and thus subject to tax as income to the employee.

Their current line is that there won’t be any taxes on cell phones, for employees and employers. It’s certainly cheap to cut a tax that nobody pays, but it’s a bad idea to link phone access to employment. Especially in an uncertain economy, giving people a reason to bet more on a job they’re less likely to keep is a bad policy.

The good news is that they’re being cautious: rather than dive right in, the IRS is asking for lots of feedback beforehand:

The first part of this groundbreaking effort will involve fact finding and receiving input from a large and diverse constituent community that includes those that are licensed by state and federal authorities — such as enrolled agents, lawyers and accountants — as well as unlicensed tax preparers and software vendors. The effort will also seek input and dialog with consumer groups and taxpayers.

The bad news?

• This is criminalizing behavior that is already illegal: although many laws already have this effect (drunk driving laws prosecute people for engaging in behavior that could lead them to be prosecuted for manslaughter), but it’s still redundant.

• In an economy like this, why make some jobs harder? If there are bad tax preparers out there, it’s good to make them stop, but adding new rules punishes every tax preparer.

• This creates a false sense of security: right now, most people pick a tax preparer based on their reputation. If tax preparers have to follow more stringent rules, it increases the incentives to pass a test rather than earning trust.

I asked IRS press representative Kevin McKeon how this will affect taxpayers, and he explained that:

This process should benefit the average taxpayer. When people pay good money, they should not get bad advice. When people get bad service from tax preparers, it hurts them in many different ways. They can get penalties for incorrectly reporting and underpaying their taxes. They can pay more in interest and penalties if a preparer gets it wrong.

Conversely, when people get good tax advice, it helps them file an accurate tax return. They avoid paying interest and penalties. And it helps the nation’s tax system, and it avoids compliance problems for taxpayers down the road.

Ensuring we have a strong system in place for tax return preparers and the associated industry is very important and must be part of our overall plan. And we must ensure our system works for the nation’s taxpayers. This review — and the resulting recommendations — can help us on that path.

So it looks like the IRS is moving from fixing mistakes to preventing them. If they can do it successfully, this will be great news for the average taxpayer (and the average tax preparer, too!).

Other Tax Blogs Chime In

• RothCPA argues that it’s redundant. Tax preparers are already punished for making mistakes.

• PappasTax is in favor, citing fraudulent promises from tax preparers.

• Roni Deutch focuses on the IRS’s long-term plan for deciding which changes to make.

• Don’t Mess With Taxes points out that tax preparers are actually less regulated than hairdressers.