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My accountant is a great guy. He’s sharp. He cares. There’s a reason I’m using him as my tax preparer.
But…
- Tax season is busy. Most accountants report working ~60+ hours a week during tax season.
- It’s easy to make mistakes on a tax return. Even a “simple” tax preparation might involve 10+ sub-documents, various inputs, transposing numbers, etc.
- Then, most importantly, there’s the knowledge required to understand how all these numbers work together. More knowledge is required to ask the right questions of your clients, to recognize what might have changed between last year and this year, etc. etc.
My point is that prepping taxes isn’t easy and mistakes will happen. Period.
That’s why it’s vital that you, reader, review your tax return. Or, at the very least, ask someone knowledgeable to help you review your tax return.
If you need an anecdote, here’s my $12,000 example from this spring.
A $12,000 Tax Mistake
On April 10, my accountant sent me a draft version of my Federal tax return. I was startled to learn that I would owe the Federal government $6,000 and receive a $1,000 refund from New York. On net, I’m paying $5,000!
I was expecting a refund, not to owe. $5,000 is a big sudden expense. Clearly, I must have made some bad assumptions.
Where did this $6,000 come from?! I got curious.
I went through the 1040 line by line, making sure I understood how each box was arrived at.
Of course, the BIG data points for most “typical” taxpayers can be found in Line 24 and Line 33 – Total Tax and Total Payments, respectively. Total Tax is the sum of all your Federal tax liabilities for that year. Total Payments shows how much you paid during the year, typically through payroll withholding (i.e., what you see on your paycheck) or estimated quarterly payments.
As I reviewed my draft return, my Total Payments seemed…quite low! Perhaps too low, I thought. This could be the cause of my consternation.
Tax Problem Solved
Sure enough, there was a small-yet-huge mistake. The Draft version showed $15,873 in Total Payments. A simple transcription error meant that the number should have been $23,996 instead.
That ~$9,100 difference, once fixed, is dollar-for-dollar in our favor! Instead of owing $6,000 to the IRS, we should be getting a ~$3,100 refund!
But wait, there’s more.
We All Make Tax Mistakes
Because you might make a mistake too. I sure did!
Between bank accounts, investment accounts, our mortgage, local taxes, donations, and payroll, we had more than 20 individual documents to submit to the accountant. As I reviewed the draft tax return, I realized I had forgotten to submit one of our documents.
This particular document accounted for more than $10,000 in deductions. These deductions lowered our tax liability by $3,000. Meaning, we owed an additional $3,000 refund.
In total, instead of owing $5,000, we will receive $7,000 in refunds. A $12,000 postive swing in the outcome.
All else equal, those ~30 minutes I spent reviewing our tax return might have been the most valuable work I’ll do all year!
You should make sure you review your tax return, too.
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