7 Tax Terrors and How to Overcome Them

Admit it. You're afraid of your 1040. That's OK. A lot of us are. And our tax fears, sometimes irrational, sometimes warranted, cause us to do a lot of dumb things when it comes to our annual returns.

Some people put off filing, some don't file at all. But fear doesn't have to paralyze you. Here are seven common tax terrors, how real they are (or aren't) and how you can overcome them.

1. Afraid I can't do my taxes myself

This fear, unfortunately, is too often justified. And it gets more true every tax season as federal lawmakers add provisions and pages year after year. The tax law publisher CCH Inc. notes that the 1913 tax code took up 400 pages in its "Standard Federal Tax Reporter." By 2007, CCH filled more than 67,000 pages of that document with tax law intricacies.

"The law is very complicated and filling out the returns is somewhat mind-boggling," says Robert Simon, partner at Eisner & Lubin in New York. "The media keeps telling everyone how difficult it is and people just get panicky. They sit down and start (the filing process) with all this in the back of their minds. I can understand why people would be afraid to do it."

Such fear, says Simon, is nothing to be embarrassed about.

"If you ask congressmen who actually wrote the laws, many don't do their own returns," he says. "They're writing policy, not looking at it from an accounting point of view."

The way our tax system works also adds to this fear.

"Many people aren't good with numbers, then once a year they wind up trying to deal with numbers," says Simon. "Any other time you spend money, before you walk out you have someone there telling you what you owe. But when you're doing your taxes, you're doing it yourself. You're telling the government what you owe them."

The remedy: Don't be afraid to ask for help. You have lots of preparer options, from a personal accountant who can fill out your return and help you plan throughout the year to franchise operations that gear up between Jan. 1 and mid-April. If your tax situation is not overly complicated, computer software might be enough to help you file with a bit more confidence. Take a look at your tax needs, then find the tax assistance that best meets them.

2. Afraid I'll overlook a tax break

Even folks who are brave enough to tackle their taxes on their own often face this fear. Again, it's not an unreasonable one. And once again, those folks in Washington, D.C., feed this fear.

Take, for example, the alternative minimum tax, or AMT. This parallel tax system can be quite costly for millions of filers, but rather than make a permanent change to the law, for the last several years Congress has opted instead for a temporary "patch." Even worse, the 2007 law change was enacted so late, it will cause a lot of grief not just for us filers, but also for the Internal Revenue Service. The slow lawmaking process has forced the 2008 filing season to be delayed until mid-February for up to 13.5 million taxpayers.

The remedy: Accept that tax filing is going to take some homework. Before you start your return, check out the countless publications -- including Bankrate's Tax Guide, of course  -- so you'll know exactly where this year's taxes might trip you up. Again, you also can turn to software or a tax pro for help in claiming all your possible tax breaks.

3. Afraid I'll make a mistake that will cost me money

This is a close relative of fear No. 2. But here, the fear is not of omission, but commission.

This includes things as simple as filing the wrong tax form. It happens. In trying to get through filing as quickly as possible, some folks opt for the easy, in this case, the 1040EZ, way out and end up cheating themselves.

Or they choose the incorrect filing status, such as single when they're eligible to file as the more tax-advantageous head of household. Those are just a couple of the many mistakes that filers make ever year.

The remedy: Slow down. No longer how long you wait to do your taxes, you still have time to do it right. Read the instructions. If you're using software, don't skip steps just to finish. Answer all your tax professional's questions. If he or she says to provide more information, then provide it. A little extra work and attention to detail could cut your tax bill or get you a bigger refund.

4. Afraid that my tax adviser is incompetent or a crook

You know you need help, but you're afraid that the person you turn to could be more of a hindrance. Unfortunately, sometimes this fear is well-founded.

The Government Accountability Office issued a report in April 2006 with the disturbing finding that in a limited study of commercial tax preparation chains in major metropolitan areas, all the returns completed in those offices were wrong to some degree.

Then in April 2007, the IRS alleged that some Jackson Hewitt franchises filed bogus returns for clients, cheating the federal government out of $70 million. The agency obtained court orders to shut down 125 branch offices in Detroit, Atlanta, Chicago and Raleigh, N.C.

Even big name, high-dollar help sometimes produces unexpected tax costs. Remember KPMG? A few years ago that global accounting and consulting firm acknowledged that some of its tax shelters didn't meet IRS standards and agreed to pay the government millions to settle the inquiry. Last month, the law firm Jenkens & Gilchrist announced it was closing its offices across the U.S. in the wake of a nonprosecution agreement it reached with the IRS about tax shelters it offered clients.

By the way, the taxpayers who participated in those companies' questionable shelters ended up owing additional taxes and penalties.

The remedy: Everybody makes mistakes, even tax professionals. The key is to make sure you don't end up paying for your tax preparer's mistakes.

Start with the hiring process. Investigate several potential preparers and thoroughly check out each before you hand over your personal tax documents.

Once you're a client, don't take every recommendation at face value. Ask questions and make sure you understand the answers. Most of all, remember the adage "If it sounds too good to be true, it probably is." There are some tell-tale signs that a tax shelter is in fact a tax scheme that could cost you dearly.

Page 1 | 2