Ever so often I get a question about what happens if you file your taxes wrong. Make you filed the wrong tax form or just discovered there was a mistake on a tax return already filed.
That’s the subject of a question I received at USTaxAid.com.
Q: It seems every year I have had help with my taxes there is always a mistake that affects the years to come. I don’t find the mistake or problem till the following year or years. What does your company do when this happens? Do you offer to correct the problem? What should I expect? I have one rental property and the last time I filed my taxes was in 2012. In 2011 depreciation was not taken either year. Should I go back and fix this? I have the property up for sale but I really don’t think it is a good year to sell it nor do I think I really should sell it.
A: There are a lot of reasons why mistakes might happen:
- You didn’t provide all of the necessary information to the tax preparer. If you didn’t get your preparer all 1099s you received, for example, you will receive a note from the IRS. They match up 1099s with your tax return. If you skip one, you’re going to get a letter.
- Your return doesn’t match K-1s that were issued to you. Again, the IRS has a matching program. If you don’t report what the IRS thinks you should, you’re going to get a letter.
- You have a shoe box (virtually or literally) of receipts and don’t have them totaled for your tax preparer. I run into people every year who complain when I ask them for the totals of costs. “What am I paying you for?” I hear. Well, let me tell you how it works in the real world.
You will pay for the bookkeeping service to compile the lists. They are likely to be inaccurate and incomplete because you’re asking a tax preparer at the very busiest time of the year to provide a service that neither you or they have time to adequately review. Plus, you’re going to pay a whole lot more for bookkeeping.
An untracked deduction is a lost deduction.
- Your tax preparer is too busy to properly prepare and review your return. If you’re pushing your tax preparer at the last minute for your return, there is a bigger chance that you’re going to have a mistake.
- There really isn’t a problem. Unless you have a really straight-forward W-2 type tax return, chances are there were choices that were made along the way with how you filed. It may not be wrong. It could just have been prepared differently than someone else would have.
In the example you’ve given, you did not take depreciation for your rental property for some years. That’s okay. You’re not required to take depreciation. You can go back to amend for it. Or you could catch it up in the current year.
One thing to consider is that depreciation must be recaptured at a flat 25% when you sell your property. If you have suspended losses, you will end up paying more tax if you take depreciation on your property. That’s because the capital gains tax rate is less than the depreciation recapture rate.
In another blog post, I’m going to address the question of assessing whether to sell a property.
If there is a take-away from this post, I’d say the bottomline is that you have to trust your tax preparer. If you don’t, get someone you can trust. Otherwise, you’re going to drive yourself crazy second-guessing them and yourself.