It's Not a Race

Filing your taxes is not a race. Getting your return in first doesn't mean you in a prize. And it doesn't mean that you get something your shouldn't because your return is filed first.

This early in the season I see clients who pick up their W-2 and make a bee-line for my door. Sometimes all they need is the W-2 but sometimes they forget a something in their haste. Something like unemployment or interest income. I give them an estimate and send them away until they get all their paperwork. A slight delay but they will get their money. So far this year, I haven't heard of any tax departments holding refunds because of cash shortages.

But the other group of taxpayers who are in a hurry this year are those who racing to claim a dependent before someone else does. Some are legitamently entitled to the exemption but they're afraid an ex-spouse, parent or child will beat them to filing and cost them the exemption and any credits that go with it. And there are those taxpayers who try to claim an exemption they know they shouldn't. They are under the impression that taxes are a race and the first to file gets the money. Maybe temporarily but paybacks, as they say, are hell

Let's say the kids lived with Mom all year and she qualifies to claim them as dependents and for several credits tied to the dependent exemption (earned income credit, child tax credit, day care credit). Before she can file her return, Dad files his return and claims the kids. (By the way this doesn't mean the preparer was at fault. Too many taxpayers know how to answer the questions to maximise their refund. Yeah, they lie!) When Mom e-files her return, it's rejected because the children have already claimed on another return.  Since we're sure that she does qualify and could supply the IRS with all the documentations they need, the return is paper filed.  In a few months, both Mom and Dad will get letters asking them to check their returns because they claimed a dependent claimed by someone else. If they made a mistake, they need to amend the original return.  If Dad doesn't amend his return, both will get "prove it letter" requesting documentation to show they are entitled to the exemptions and credits.  Since Mom can prove everything, Dad must now payback any refund from claiming the kids. And that will include interest and penalty. Also if earned income credit was involved, Dad could lose the ability to claim the credit, even if actually entitled to it, for a long time.

So, I know you want your refund but waiting to get everything you need might be faster than charging in with pieces at a time. And no matter what your barber, guy at work or buddy says, filing with dependents you shouldn't use will come back on you.

 

Comments

[Mark Randall]

Great tax information. What is the best thing to do if you are seeking out tax relief?

[Monika Hatfield]

I have seen people who are ready to file their tax returns after getting their last paycheck for 2011. Mostly they expect refunds and they have already spent the money - which really doesn’t surprise me in the current economy.
Some people could have take advantage of a few tax benefits if they only planned ahead. That’s way I always encourage people to consult a professional before making important decisions (with potential tax effects).