Nobody likes unexpected tax bills or IRS penalties. So what can you do to help minimize the possibility of errors on your return? And if an error does still slip through, what then? In both cases, it’s often a matter of paying close attention to documentation.
Avoiding tax errors
Everyone should pay attention to what their tax preparer sends them. Many tax professionals will send out a tax organizer—a questionnaire that helps taxpayers think through all the big and small items from the past year that could impact their taxes.
Big life changes in particular should be called out in the organizer, as they’re a common cause of tax filing errors:
- Selling a business
- Selling interest in a building or shares in a closely held business
- Inheriting money or an IRA
- Turning 721 and triggering mandatory IRA distribution requirements
In these cases, good record keeping is crucial—as is sharing that information with your advisor.
For example, a problem that can attract unwanted IRS interest is when someone makes an extraordinary gift, such as land, to a university or charitable organization. The value of that property has to be properly documented and the gift must be acknowledged by the organization.
When gifts of stock or other property (like a vacation home) are made during one’s life, good records are essential to avoiding tax problems down the road—especially for the recipient. That’s because the gift’s “cost basis”—the purchase price including any adjustments or improvements—also transfers to the gift recipient.
Say mom and dad give their vacation home to their adult child. If, later on, that child sells that house, the cost basis used to determine how much profit was made on the sale is the purchase price of the home when the child’s parents originally bought it plus any improvements they may have made such as a room addition, new deck or new windows, just to name a few.
Correcting tax errors
If you do make a mistake, don’t panic.
With some common mistakes, such as math errors, IRS computers will often detect the error and send you a bill. You’ll be required to pay interest on the unpaid tax, but unless the IRS thinks it’s a deliberate or particularly large omission, you probably won’t owe a penalty.
If you or your preparer discover an error after filing, it is recommended that you file an amended return as soon as possible. Remember, your preparer will need to correct all the errors in the return—not just the ones that are favorable for you.
It’s important to note that your preparer must file amended returns on paper (rather than e-filing) and they can take longer for the IRS to process. So, the sooner you correct any mistakes, the sooner you can resolve any potential conflicts.
1. For most retirement accounts, you must begin taking required minimum distributions (RMDs) at age 72. (Roth IRAs are an exception.) Note: If you turned 70 ½ on or before December 31, 2019, you must still start RMDs at age 70 ½ not 72.
Tax laws or regulations are subject to change at any time and may have a substantial impact on your individual situation. Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and legal advisors before taking any action that may have tax or legal consequences and to determine how this information may impact your own situation.