E-file Postmortem: A Few Glitches to Work Out for Next Year

Also, how to correct your already filed return and a reminder to review your payroll withholding.
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Welcome back to the Tax Forum. I hope April 15 turned out to be less painful than you anticipated. This week, we'll take a look at how e-filing went, tell you how to correct a mistake on the tax return you just filed and remind you to adjust your payroll withholdings. And read on to see whether e-filing makes you audit bait.

Any other questions? Send them to

taxforum@thestreet.com, and please include your full name.

E-File Foul-Ups?

Judging from your email, e-filing went well for many of you. But among those who had a tough time, there were two common denominators: Social Security discrepancies and an overabundance of securities trades.

If your personal information is different from the data Social Security has on file, you probably ran into e-filing difficulties. Before your return is transmitted to the

Internal Revenue Service

, your Social Security information has to match what is already on file. For instance, reader

Nancy Newton Becker

couldn't transmit because Social Security thinks her last name is Newton Becker. In reality, Newton is her middle name. And

Stephen W. Hiemstra

couldn't e-file "because of a discrepancy in my wife's birthday as reported to Social Security."

The solution is to call your local Social Security office and straighten these things out.

Some taxpayers who are active traders were disqualified from e-filing. Turns out that if you had more than 97 line items on your

Schedule D

- Capital Gains and Losses

, you could not e-file your return because of a limitation imposed by the IRS, according to Eddie Feinstein, vice president of electronic services at

H&R Block

.

But the worst part was that the commercial tax software packages did not make this known. So reader

Greg Ray's

accountant entered his 260 trades into TurboTax only to find out he could not e-file the return. Poor

Michael Arnold

laboriously entered his 98 trades into TurboTax only to be disqualified from e-filing.

What's the solution? At the moment, the only solution is to file your returns the old-fashioned way, by snail mail. You can't just e-file your gross numbers and attach a detailed trade schedule to your

Form 8543-OL

- U.S. Individual Income Tax Declaration for On-Line Services Electronic Filing

. A detailed trade statement is not an authorized attachment for e-filing, says Feinstein.

Apparently, the IRS is working to find a solution to this. We'll keep you posted.

Does E-filing Spur Audits?

I am under the impression that e-filing would lower the odds of an audit. Is that a myth? -- Nick Palmiotto

Nick,

If the IRS wants to audit your tax return, you're going to get audited. It doesn't matter whether you e-file or drop your return in the mail. There's just no way around it.

No one really knows what generates an audit anyway. People in the industry have their suspicions, says Feinstein. But there's no

Official IRS Guide to Avoiding An Audit

out there. Still, I asked the IRS for some guidelines, and here's what the service considers audit territory: unusual transactions and deductions, and business expenses or charitable contributions that are excessive for the stated income level.

Vague, isn't it?

But e-filed returns and snail-mail returns are on the same playing field even before this audit selection process begins, says Feinstein. If you send in a paper return, an IRS employee will enter your information into its system. When you e-file your return it goes directly into the same system, so you're saving the service this step. But regardless of how your return got there, once all the returns are in the system, they all look the same. This is when the audit selection begins.

E-filing will help you prevent silly errors. Your return can't be e-filed if, for example, a Social Security number is missing or incorrect or if the numbers don't add up. That makes e-filed returns virtually error-proof -- an error rate of less than 1%, according to the IRS. On the flip side, the error rate for paper returns is around 21%. These errors require the service to send you a notice to fix your silly error. By e-filing, you cut down on your IRS correspondence. And that could only be a good thing.

How Do I Fix My Return?

I just realized that I made an error on my 1040. I mailed it on April 13, and realized it while putting together the work papers for the file. Should I file a 1040X immediately? -- Karen Finerman

Karen,

Don't sweat it. Just file an amended return.

Form 1040X

- Amended U.S. Individual Income Tax Return

is used to correct mistakes on your Form 1040.

Technically, Form 1040X has to be filed within three years after the date you filed the original return or within two years after the date you paid the tax, whichever is later. But file it as soon as possible. That way you won't have to worry about it.

Unfortunately, you can't e-file an amended tax return; it must be filed on paper. (That's another thing the IRS needs to address for next year.) Also note that amending your federal return may affect your state tax return. So be sure to amend that return as well, if necessary.

Time to Revisit Your W-4?

Does Uncle Sam owe you a big refund check? Or did you have to send money to him?

If you had either experience, you may want to adjust the amount of tax your company withholds from your payroll check. That means revisiting

Form W-4

- Employee's Withholding Allowance Certificate

.

You fill out Form W-4 when starting a new job. In a nutshell, you tally your dependents, and that's what your payroll department uses to determine how much tax to withhold from your paycheck. Odds are, you probably haven't seen the form since your first day on the job.

Maybe now's a good time to go to your human resource department and dig it up. Then you can make some adjustments for 1999 so you don't end up repeating your 1998 tax situation.

The instructions on Form W-4 are totally confusing, so we wrote our own

guide to the form last year. Check it out.

But don't blow it off. If you got a large refund, that might mean you're having too much tax withheld from your paycheck, and why should the government have free use of your money all year long? If you owed a big chunk, maybe you're not withholding enough.

Your goal is to estimate your 1999 income and adjust your withholdings so that you won't owe Uncle Sam and he won't owe you next April 15.

The IRS' Web site has a

W-4 Calculator available to help you out. And for more information, check out

Publication 919

- Is My Withholding Correct for 1999?