Millions of Taxpayers Overlooking Important Tax Breaks

According to a report by the U.S. Treasury Inspector General for Tax Administration, a Treasury Department unit, millions of people overlooked important tax breaks that they were entitled to on their 2006 tax returns. On the other hand, millions of people made mistakes and took deductions on their 2006 tax returns that they were not entitled to.

Among the tax benefits that were overlooked were the telephone excise tax refund and the deduction for state and local sales taxes. For example, nearly 2.1 million taxpayers who were eligible to deduct their state and local sales taxes didn’t do so, a number that was up 50% from the previous year.

Among the benefits that taxpayers took that they were not entitled to were additional exemptions for Hurricane Katrina victims and taxpayers taking both the tuition and fees deduction and an education credit. Tax law allows taxpayers to take the deduction or the credit, but not both.

So, what are the reasons that so many mistakes were made for the 2006 tax year. One reason is that the tax laws are complicated, there’s so much to keep track of, and that leads to taxpayers being more prone to overlook deductions or improperly take deductions.

Another reason for all the mistakes is that Congress was so late last year in renewing several tax breaks that had expired. The tax breaks were not included in the 2006 tax instructions because the deadline for sending the 2006 forms and instructions to the printers had already passed by the time Congress finally renewed the tax breaks.

So, what does all this mean to you if you’ve already filed your 2006 tax return?

First of all it means that it might be a good idea to review your 2006 tax return. You can either look over it yourself or hire a tax professional to do it for you. Many tax professionals will provide a review of your last year’s tax return at a very modest fee.

What should you do if in reviewing you 2006 tax return you do find that you missed taking a deduction that you are entitled to? Then, you should file a Form 1040X, Amended US Tax return. You can file this return and get a refund on any deduction that you might have missed. Returns can be amended up to three years after the date you originally filed your tax return.

What should you do if, after reviewing your return, you find that you took a deduction you were not entitled to and that you owe the IRS money? My suggestion would be to file an amended return and pay the IRS what you owe them on the mistake. Odds are that the IRS will eventually find the error, but by the time the IRS bills you for the error, the interest and penalties will have had a chance to accrue more substantially.

I’m hoping, that in 2008, filing for the 2007 year will present fewer headaches for taxpayers.