Tax Expert Says Nearly Everyone Makes A Mistake

The U.S. tax code is so complex that almost no one can file a tax return without making a mistake, according to New York University Law School Professor Deborah Schenk. On the eve of the April 15 tax deadline, Schenk gives Robert Siegel examples of common mistakes.

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ROBERT SIEGEL, host:

The week before last, Governor Kathleen Sebelius of Kansas, nominated to be secretary of Health and Human Services, went before the Senate Finance Committee for confirmation. And in addition to answering questions about reforming health care, reducing poverty, increasing adoptions, she was also obliged to make the following statement. After she and her husband sold their home for an amount less than the outstanding balance on their mortgage, they continued paying off the loan, including interest they mistakenly believed continued to be deductible mortgage interest. Well, that error and a couple of others, she testified, were corrected in their amended returns.

Secretary Sebelius was among the many Americans who run afoul of the tax code. And while unpaid taxes can be the banana peel that causes the flop of many a nominee, they might also be a measure of just how complex the federal income tax system is.

Professor Deborah Schenk, who teaches taxation at NYU law school, joins us now from New York City. Welcome.

Professor Deborah Schenk (New York University Law School): Thank you. It's nice to be here.

SIEGEL: And Governor Sebelius owed about $7,000. How common is it for Americans to make mistakes on their income taxes?

Prof. SCHENK: Oh, if I had to hazard a guess, I'd say almost everybody makes a mistake on their income tax return. It's very difficult to file a perfectly accurate return.

SIEGEL: What are the most common errors people make?

Prof. SCHENK: Well, most of them are really quite small errors, negligence, maybe. Things like not actually signing the return, or putting the wrong Social Security number on. Or some people even forget to put a stamp on the return.

SIEGEL: And when it comes to actually entering one's income in the taxes, where do the mistakes start?

Prof. SCHENK: Oh, there are lots of them. Very common mistakes are people make - have two jobs, and they file a separate return for each job. A lot of people don't understand what their marital status is. Marital status for state law purposes is quite different than marital status for tax purposes, or they list dependents who aren't dependents.

SIEGEL: The wrong number of dependents - I mean, that's trying to figure out whether your children are still your dependents, or whether you spend so much on one of your parents, whether they should be a dependent or not?

Prof. SCHENK: Yes. I know it's hard to believe, but I spent many years working in clinics, and one of the most common mistakes we saw was that people did not know whether they were entitled to a dependency exemption. Say, for example, you separate from your wife, and then you live with your girlfriend and she had children, and an elderly mother that lives someplace else also contributes. Which person is entitled to take a dependency exemption?

It's a really complex question, and most people just aren't able to figure it out. And the result is, of course, that all three or four of them will take the dependent on the return.

SIEGEL: Is there any cross-referencing on the audit to figure out that the grandma in Missouri is being claimed by three different people as a dependent?

Prof. SCHENK: There actually is. In order to…

SIEGEL: There is. Okay.

(Soundbite of laughter)

Prof. SCHENK: Yes, you have to list a Social Security number to take a dependent, and the IRS checks.

SIEGEL: Now, for four years, I had the experience of paying income taxes, on relatively modest income, to two different countries. And for the U.S., I signed what amounted to a financial novella that was prepared by an accountant. And for Britain, for the U.K., it was a single sheet. No fuss, no muss. There was no way I could have avoided coming up with the right answer. How did we come up with this system?

Prof. SCHENK: Well, for a start, we're a very sophisticated, complex economy, and that requires a very sophisticated tax system. And the other reason is attributable to incentives. Congress loves to provide incentives to the tax code. Any problem we want to solve, let's use the tax code. And the result is that every year, it gets more and more complex.

For example, this year's stimulus bill had more than 300 changes to the Internal Revenue Code, all designed to stimulate the economy. But it's certainly mucked up the code.

SIEGEL: Have you filed your taxes already?

Prof. SCHENK: I'm in the process.

SIEGEL: In the process. Okay.

(Soundbite of laughter)

Well, thanks very much for talking with us about it. Deborah Schenk, who is a professor at NYU law school, where she teaches taxation. Thanks.

Prof. SCHENK: My pleasure.

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