Rushing to finish your tax return? Avoid some costly mistakes.

Waiting until the last minute to prepare and file your individual or business tax return can lead to costly errors and missed tax-saving opportunities. It can even invite extra scrutiny from the Internal Revenue Service.

In this interview, Gil Charney, principal tax research analyst of The Tax Institute at H&R Block, offers tips to help last-minute individual and business filers avoid common tax-return errors.

Q: What are the most common errors last-minute filers make?

A: People who rush to file their individual tax returns are prone to errors, even things as basic as pulling the wrong number from a tax table. But some of the most frequent mistakes are:

  • Omitting income, especially when it's not reported on tax documents such as 1099s, W-2s or K-1s.
  • Forgetting about estimated tax payments made earlier in the year, which could cause the taxpayer to overpay their tax liability.
  • Claiming the wrong filing status or number of exemptions. This is particularly true for nontraditional families, such as unmarried taxpayers living together with children from former relationships or parents living with their adult children.
  • Entering an incorrect Social Security number, especially for children claimed as dependents.
  • Taking the standard deduction when they'd be better off itemizing deductions. This is the faster, but not necessarily better, option for the taxpayer who qualifies to itemize.

Q:  Are there any particularly costly errors or omissions?

A: Many of the costliest errors occur because taxpayers don't keep updated, accurate records or they don't explore all of the deductions and other tax incentives they may qualify for. For example, failing to correctly deduct points you paid on a refinanced mortgage could cost you hundreds of dollars, if not more. Failing to claim an education credit can cost as much as $2,500 per student. Some mutual funds pass along foreign tax credits to their investors, so not claiming those credits can also be a big missed opportunity.

Any kind of life event, such as buying or selling a home, getting married, having a child, sending a child off to college or losing a job, can generally have tax consequences — usually favorable, but it's up to the taxpayer to identify them.

Keep in mind that some people also underpay taxes because of mistakes — and this can lead to problems with the IRS. For instance, some people claim a dependency exemption they're not entitled to. In 2012, this would mean they understated their income by $3,800, and the IRS may challenge that exemption.

Q: Does making errors on your individual tax return increase the odds of an audit?

A: If you make an honest mistake — such as failing to report a small amount of interest income that was reported on a 1099-INT form — the IRS probably won't be knocking on your door. But you are likely to receive a CP-2000 notice proposing an adjustment to your income for the missing item. The IRS also looks for inconsistencies on individual tax returns. Someone earning $30,000 a year who claims $15,000 in charitable deductions or someone who claims a lot of business expenses for a side business that earns little revenue is also more likely to be contacted.

Q: What can last-minute filers do to avoid mistakes?

A: Of course, it's better to not wait until the last minute. But taxpayers should make sure they have all the tax-related documents and records necessary to complete the return. Organization is the key to avoiding errors, regardless of whether the taxpayer is using software or working with a tax professional to prepare the return. Two steps I suggest:

  • Make sure to check the return for typos and transposed numbers. Even sophisticated tax software will not always catch input errors.
  • Taxpayers who've decided to use a professional tax preparer shouldn't wait until the last minute to schedule an appointment. Tax preparers get very busy as April 15 draws near, so they should schedule an appointment as early as possible and have everything ready to go for the appointment.

Q: Is filing for an extension with the IRS a good solution if you're worried about being rushed?

A: Absolutely. It's much better to file for an automatic six-month extension using Form 4868 than to file an individual tax return with errors. An extension allows the taxpayer more time to gather all the information needed to prepare the return, or have a professional do so. Note, however, that if you expect to owe taxes, it does not give you more time to pay. Any expected tax liability for 2012 should be paid by April 15, 2013 to avoid penalties and interest.

Another option is to file the return as best you can and then set up time with a tax professional to review it. Any errors or omissions can be corrected with an amended return.

Q: How does having a tax professional help?

A: Some tax-savvy individuals may be able to prepare their own returns, but there are many good reasons to consider working with a tax professional.

A professional will ask questions about events and activities in the taxpayer's life that may have a tax impact that hasn't been considered. For instance, expenses for a hobby you pursue may be deductible, with some limitations, if the hobby generates income. Or, you may have sold stock or had other complex financial transactions that require professional assistance. It's always advisable to have a professional at least review your individual tax return if you have rental property, complex security trades, foreign income or business activities. A tax professional also should know about recent tax law changes and can assist in long-term tax planning, including adjusting income tax withholding or determining whether estimated tax payments should be made.

Also, as noted above, having a tax preparer review a return that has already been filed could result in an amended return and potentially a larger refund that can offset some or all of the tax professional's fees.

Information and opinions from third-party sources are believed to be reliable, but do not necessarily reflect the views of Ameriprise Financial. Accuracy and completeness cannot be guaranteed. This is for informational purposes and is not intended as advice designed to meet the particular needs of an individual investor.

Ameriprise Financial and its representatives do not give legal or tax advice. Please seek the advice of professionals, as appropriate, to evaluate any specific information or advice.

H&R Block is not affiliated with Ameriprise Financial.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

Business owners who put off preparing and filing their business tax returns until the last minute may be costing themselves thousands of dollars in errors and missed tax-saving opportunities. They may even be inviting extra scrutiny from the Internal Revenue Service.

Q: What are common mistakes made by business owners and self-employed individuals when filing their tax returns at the last minute?

A: Rushing to file a tax return can lead to mistakes and omissions, some which may be flagged by the IRS. Some of the most common errors I see business owners make include:

  • Forgetting about estimated tax payments they made, potentially costing them thousands of extra dollars.
  • Overlooking business deductions they qualify for, often because they didn't keep accurate, updated records or the necessary documentation.
  • Not differentiating between business and personal expenses, especially with mixed-use assets such as vehicles.
  • Miscalculating depreciation, especially with Section 179 expensing and bonus depreciation rules that keep changing.
  • Inaccurately reporting 1099 information, particularly on Form 1099-MISC – Miscellaneous Income.

Q: Are there any particularly costly errors or oversights?

A: Business owners tend to have complex tax returns but also have many opportunities to lower their tax liability. This is why I recommend working with a tax professional. Sure, a business owner could save on tax prep fees by doing their own taxes, but they also risk losing hundreds or thousands of dollars on mistakes and missed deductions.

One of the costliest mistakes I see is improperly claiming deductions. For instance, health insurance premiums can be fully deductible against gross income for self-employed taxpayers. So they may pay more taxes if they instead report health premiums as an itemized deduction. Other expensive mistakes include erroneously reporting income and expenses on rental property, taking incorrect depreciation-related deductions or applying the standard auto mileage deduction when the actual expense method is more advantageous.

These errors can often be avoided by keeping detailed, organized records. Some business owners fail to keep business and personal expenditures and income separate. This makes tax time more stressful and leads to guesses and estimates that could result in an overstatement of business expenses or understatement of income — inviting IRS scrutiny.

Q: Are there particular business deductions that you see business owners and self-employed individuals missing out on altogether?

A:  Yes, there are lots of deductions for businesses, so it's easy to overlook ones they qualify for. Here are some common ones they miss out on:

  • Small business retirement account contributions, such as to a solo 401(k), Simple IRA or SEP IRA
  • Legal expenses
  • Local taxes
  • Start-up expenses, which can be deducted up to $5,000 in the first year of business with amortization of any additional amounts
  • Many esoteric credits that businesses may qualify for but are not aware of, such as an up to $500 annual credit for starting a SEP (Simplified Employee Pension) for each of the first three years of the plan, the work opportunity credit or the investment credit.

There are many others, which a tax advisor can help identify.

Q: What are some of the ways businesses owners can avoid making mistakes on their tax returns, even when filing late?

A: First, they need to get organized. Tax planning should be a year-round ritual, not a last-minute effort in March and April. They need to keep receipts, journals and other records to support business income and expenses. Keeping logs and records throughout the year is a big step toward organizing one's tax materials and it makes tax time far less stressful. Moreover, business owners need to make quarterly estimated tax payments, so they really can't wait until the last minute to get organized — or they risk over or under paying estimated taxes and potentially owing penalties.

And even though I recommend business owners consult a tax professional, some still insist on preparing their own business tax returns. If that's the case, they should familiarize themselves with how tax laws affect their business and the bottom line. There are several IRS publications they might want to read, such as the IRS instructions to Schedule C (for sole proprietors); IRS Publication 334, Tax Guide for Small Business; IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses; and Publication 946, How to Depreciate Property. This list just scratches the surface, but you can find these publications and more at www.irs.gov/publications.

If small business tax payers are crunched for time, they should also consider filing for an automatic six-month extension. They still have to pay any expected tax liability for 2012 by April 15, 2013 but this allows more time to complete the return. Different filing deadlines apply to business returns that don't use IRS Form 1040, Schedule C.

Q: Does making errors in a tax return increase the odds of a business getting audited?

A: Not necessarily, although having a lot of errors may suggest the return was prepared negligently and trigger an inquiry. The IRS looks particularly close at inconsistencies and questionable entries. So, for instance, a business with $50,000 in gross receipts and $60,000 in “other expenses” might trigger an inquiry if sufficient explanation for these expenses is not provided. Self-employed individuals with large incomes or who are majority shareholders in S corporations are more likely to get audited than taxpayers whose only earnings are from a salary and with no other income or deductions. The IRS's resources are not unlimited, so it will look at returns that justify a closer look for possible adjustment.

The IRS also audits taxpayers at random, not only those in higher-risk categories. Therefore, all taxpayers should complete their tax returns as accurately as possible and document their income and deductions.

Q: How can having a tax professional help?

A: Professional tax preparers may be able to assist business owners with tax planning, which isn't confined to the few months of tax season. They can also serve as an advisor in helping small business owners determine the tax impact of a business decision before it is made so they can plan accordingly, rather than dealing with the results at tax time. For instance, hiring one or more employee, purchasing depreciable assets or incorporating a business all have tax implications.

A tax professional can also ask the right questions about a business, its income, expenses, investments and other events in the business owner's life that have tax ramifications. Software can do this to a certain extent, but it does not drill down with additional questions based on your responses to the level a professional would. If the taxpayer has made several errors or omissions, it's a good sign that his tax return should be prepared professionally.

Information and opinions from third-party sources are believed to be reliable, but do not necessarily reflect the views of Ameriprise Financial. Accuracy and completeness cannot be guaranteed. This is for informational purposes and is not intended as advice designed to meet the particular needs of an individual investor.

Ameriprise Financial and its representatives do not give legal or tax advice. Please seek the advice of professionals, as appropriate, to evaluate any specific information or advice.

H&R Block is not affiliated with Ameriprise Financial.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.