Tax season is upon us and there are temptations all around to snip a little income off here, add a deduction there, and generally trim the tax bill. First, don’t listen to the advice that everyone is doing it, be it your neighbor with six kids or the neighbor down the street who does tax returns on the side.
If you have more questions than the software can handle, it is worth your time to consult a reputable tax preparer. Ask questions, get the information you need to decide what claims are best for you.
If there are issues lurking in past returns, and the IRS has not yet discovered them, you may want to amend the return to correct the situation. Again, advice from a reputable tax preparer or other tax professional may be needed before you act.
What are some of the signs the IRS looks at in determining when to examine a return? While they keep that information secret, there are some obvious clues:
- Sudden decreases in income not accounted for through job changes or unemployment, retirement, and similar situations. This includes additional children, claims for credits not made in previous returns, etc.
- Forgetting to file a return in a previous year, where there is income reported through your employer, other sources of income, investment statements, etc.
- Self employment – is this meant to generate income, or is it just a hobby? While the income from both is reported, and taxed, hobbies do not allow the deductions that an income generating activity does.
- Deducting expenses for a car or a home office can also lead to IRS curiosity. Can you substantiate your claimed deductions with logs and receipts?
- Claims for meals and entertainment can lead to IRS audits. Be prepared to show the business purpose of these expenses.
- Overabundant generosity – one recent case claimed over $100,000 in clothing donations. The taxpayer would have had to have dropped off bags and bags of used clothing almost every night of the year.
- Foreign accounts are reportable by the bank or fund holder. The numbers you report should be verified.
- Check the math – the numbers should add up. If they do not, expect a letter from the IRS.
If you do receive a letter from the IRS, pay close attention to the deadlines for replies. Once they pass, there may not be another opportunity to review and contest the IRS recalculations.
Need more information? Consult a tax professional.