With the tax deadline bearing down on us, I thought I’d touch base today, to give you some thoughts on what could get you into hot water THIS tax season.
And, well, really any tax season.
Now … sometimes, clients come to us from other professionals because they have gotten themselves into hot water with the IRS, and they’re facing the withering gaze of the auditors.
Hopefully, you haven’t experienced that.
And let’s not let that happen in the future. Here’s how.
Six Common Ways Taxpayers Receive IRS Audits
“What is once well done is done forever.” – Henry David Thoreau
We don’t want you to face the pressure of being audited. Nobody enjoys it, so we’ve put together a list of our “big six” ways that most people end up getting audited. Simply avoiding these isn’t a 100 percent foolproof plan — but it certainly helps.
Here are the biggies we watch out for when preparing and submitting tax returns…
1. Indefensible claims
There are so many old wives’ tales saying that certain items trigger an IRS audit: home office deductions, passive losses, schedule C (sole proprietorship) activities, etc. But you really can’t predict the trigger — and you can drive yourself crazy trying. However, you *can* adopt the “be reasonable” mantra about every item on your return, including these. So if you don’t have a decent claim for a home office, don’t claim it. If your money-losing sole proprietorship is really more of a fun hobby, treat it as such.
Look–don’t be scared to take deductions and losses to which you’re entitled, but don’t take tax positions you aren’t comfortable defending. If you take reasonable tax positions, you likely won’t end up needing to defend them. And if you do face an IRS audit, it will likely be far easier.
2. It doesn’t all add up
This seems like it should go without saying, but make sure you add, subtract and multiply accurately. Check your numbers through each step and do some simple math checks when you finish. If you do make a math mistake, you are likely to get a math correction notice from the IRS. This isn’t an audit. But your goal is to minimize your interaction with the IRS bureaucracy, which, ah… isn’t known for the best mail handling practices.
3. Lost 1099
This can be confusing, because the Form 1099 comes in many varieties, including 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. These forms are sent by payers of such funds to both you and the IRS.
So regardless of how many 1099s you receive, make sure they are all accounted for on your return. There are also Forms 1098 which lenders send (to you and the IRS) recording how much interest you paid. The IRS matches your return against the 1098s and 1099s. So one sure way to guarantee an IRS query is to fail to account for something! If a Form 1099 is wrong–say it reports more income than you had–you can explain or deduct it on the return, but you need to first report it.
4. Suspicious OVER-reporting
I’m not talking about under-reporting income, or holding necessary information back. But you’d be surprised how many professionals and amateurs alike try to submit too much *supporting* information. True, if your return is complex, you may need to add explanations or disclosures in footnotes. Be concise, truthful and accurate, but don’t provide copies of sales agreements, settlement agreements, bank statements, etc., unless you are later asked by the IRS to do so.
Disclosures can be made on regular paper or special IRS forms. A Form 8275 “Disclosure Statement” on plain paper can be used any time you need to disclose something that can’t be adequately disclosed on the forms. Form 8275-R “Regulation Disclosure Statement,” is for disclosing positions that are contrary to IRS Regulations or other authority. You shouldn’t be filing a Form 8275-R –or taking a tax return position that would require it– without professional help.
5. Fighting unnecessary fights
If you take reasonable tax positions, and complete your return accurately, checking your math, why should you pay a bill if the IRS sends you one?
Frankly, it’s simply a matter of practicality (and wisdom), rather than principle. It just doesn’t pay to fight with the IRS on small matters. So don’t get into the bureaucratic system and risk bigger problems for a few dollars. Just pay it, and move on.
6. Ticky-Tack Prior Year Amending
Here’s the reverse situation of my previous point: amended returns are reviewed much more regularly than initial returns. So if you forgot a deduction or otherwise think you can get a small amount back by amending, think twice before amending your return (i.e. — consult with a pro). Consider whether you might have bigger problems if other matters on your return, unrelated to the amendment, are reviewed. Yes, you can win a battle … and lose a larger one.
And a last word: No matter how careful you are, there’s no way to guarantee you’ll never have a tax controversy. Sometimes your number just comes up.
And if your number is called, well, we’re here to walk with you …
Edwin Casanova CPA PC