Saturday, February 26, 2011

Can it be too good to be true?

Tax Tip:

I'm skipping the daily question as I have an important alert. A client sent me almost the exact version of yesterday's question for me to review. (1) His teenage daughter filed her first tax return on a very popular tax preparation software program. (2) In addition to her W-2 wages, she had a Form 1098-T, used to report college tuition, and (3) the 1099-B form reporting the exchange of mutual funds was omitted.

What I found really astonished me. The software allowed her to take the refundable American Opportunity Credit which she clearly did not qualify to take, instead of the nonrefundable Education Credit she was entitled to. I had to override my software and force fields to replicate her return so I could amend it.

My alert is this: don't assume because the computer says it's so, that it really is right! Please take the time and read the instructions for the form in question. Had she read page four of the instructions for Form 8863, she would have realized that she couldn't take the refundable credit.

Many young people are filing their tax returns with missing or erroneous information, and then about 6 months later receive a notice from the IRS along with a large bill. Most often, the IRS computers don't catch these errors at first pass. Then after much time has passed, the error does surface, and the young taxpayer is stuck with having to return the excess refund received, and in addition, pay interest, and if the error was large enough, pay an additional negligence penalty. No fun!

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