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Basic, Careless Mistakes Trip Millions in Filing Tax Returns : Finance: Forgotten signatures, missing forms and miscalculations delay refunds and can trigger penalty charges or audits.

March 15, 1994|VIVIAN MARINO | ASSOCIATED PRESS

NEW YORK — A forgotten signature. Missing forms. Miscalculations.

They're the nightmare of any self-respecting tax preparer.

Yet these and other careless mistakes crop up on millions of tax returns each year, resulting in delayed refunds and, in some cases, interest and penalty charges for the taxpayer.

"All of those things can slow the return process down. . . . Most can be avoided," said Nancy Anderson, manager of special tax projects for H&R Block Inc. in Kansas City.

Mathematical errors are by far the most common. The Internal Revenue Service says 4.3% of all individual tax returns for 1992 contained some type of miscalculation, up from 4.2% in 1991.

Other frequent errors include failing to sign and date a return, note a change of address, write down a Social Security number, or enclose W-2 forms. Many also involve writing down the wrong tax liability from tax tables, filling in the wrong line on a tax form, or neglecting to claim a standard deduction.

The IRS computer system quickly spots the more obvious gaffes.

In cases of math errors, the computers will automatically correct the problem, then process the return. Other mistakes--particularly the more involved ones, like misinterpretation of the tax laws--may first require an exchange of letters with the taxpayer, also known as a "tax contact."

The agency's computer system has been especially vigilant in catching discrepancies between documents supplied by a bank or employer and information listed on a return.

"Some people may not report all the income that's reported by companies to the IRS. That's a big mistake," said Fred Daily, a San Francisco tax attorney and author of "Stand Up To The IRS."

"They might say, 'Well, I only made $6 in interest on a savings account. Why should I include that on the return?'

"(Or) a handyman who works for cash may not realize that a company is obligated to report (to the IRS) . . . if they pay him more than $600 a year."

Any mismatch usually will result in a tax contact, and could, in some cases, lead to a full-blown audit. There are about 5 million tax contacts each year and most are resolved quickly.

The IRS, though, has up to three years to assess a deficiency on a return, and up to six years if there's an error in calculations of at least 25%. The statute of limitations for fraud is unlimited.

"One thing that lulls people into a false sense of security is that the IRS may not get around to matching information on tax returns . . . until two years after the original due date of the tax return," said Daily.

Whether deliberate or unintentional, mistakes can bring taxpayers significant penalties.

For instance, failure to place a Social Security number on a return, statement or other document that requires it can result in a $50 fine for each offense. More serious errors, such as a substantial understatement of taxes due, can result in a 20% payment on the underpayment.

If a reasonable cause exists, however, the IRS may waive any penalties, though it may charge interest on taxes due if a mistake causes a return to be filed late, said Larry B. Scheinfeld, a partner at KPMG Peat Marwick's New York office.

"I would think they wouldn't assess the penalty . . . unless you're doing something underhanded. They tend to have some sort of sensitivity," he said.

Still, that hasn't always been the case.

Robert J. Garner, national director of personal financial counseling for Ernst & Young, recalls one client who was hit with substantial penalties and interest charges after writing in a deduction on the wrong line. The client had discovered the mistake, but instead of redoing the form, made his own editing changes.

"It wasn't a tax error. It was an error in filing his return. It just mushroomed . . . and he ended up getting audited," Garner said.

Of course, the IRS also has been known to make a few mistakes of its own. The agency has an estimated 1% to 2% error rate in processing claims, according to Daily.

But it's not important who's responsible for the error. It's always up to the individual to correct the mistake, Daily said.

"The system is not self-fixing. If the IRS says you didn't report certain income and your return clearly says you did, it's up to you to correct that mistake," said Daily.

H&R Block's Anderson recommends individuals "prepare their returns as early as possible, set them aside for a couple of days, go back to review them for arithmetic, and make sure they're signed with the right address."

The return can always be amended later, she added.

Anderson says H&R Block has a separate quality-control department that does nothing but check for theory and math. But if any mistakes slip by, the return probably will be kicked back automatically, she said.

The IRS says the mathematical accuracy for returns filed electronically is nearly 100%.

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