Avoid this while filing your taxes was published by JD Supra on 4/13/18.
To avoid possible scrutiny or oversight by the IRS, Accuracy is a key factor when filing Tax Returns. Taxpayers want to make sure that their returns are processed correctly by the IRS. Common tax filing errors such as a missing Social Security Number, a name spelled incorrectly, a filing status error, errors in deductions and credits, math mistakes, incorrect bank account numbers, not signing the Forms or a PIN error can cause major problems for a Taxpayer and possibly bounce back a Tax Return back to the Taxpayer.
Taxpayers ought to avoid the following as they are some of the most common Red Flags to the IRS:
- Failing to Report All Taxable Income. IRS obtains copies of all 1099s and W-2s that Taxpayers receive. Taxpayers ought to report all required income on your return. IRS computers are efficient at matching the numbers on the forms with the income shown on the Taxpayer’s return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill or reject the return.
- Taking Higher-than-Average Deductions. If deductions on the tax return are disproportionately large compared with the Taxpayer’s income, IRS may pull the return for review.
- Taking Large Charitable Deductions. If charitable deductions are disproportionately large compared with the Taxpayer’s income, it raises another red flag. IRS knows what the average charitable donation is for a Taxpayer’s income level. Taxpayers ought to keep all supporting documents, including receipts for cash and property contributions made during the year.
- Failing to Report a Foreign Bank Account. IRS receives Taxpayer foreign financial account information from Foreign Financial Institutions under FATCA as well as other information exchange programs.
- Taking an Early Payout from an IRA or 401(k) Account. IRS wants to be sure that owners of traditional I.R.A.s and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax.
- Underestimating Gains made on Investments. If a Taxpayer sells an investment, the Taxpayer needs to figure out the taxable gain (or loss) by taking the difference from what the Taxpayer paid for the investment (cost basis) and the sale price.
- Failing to Report Digital Currency Transactions. IRS is on to digital currency users who have failed to report their profits and pay tax as evidenced by the IRS usage of new software from Chainalysis. The software will help IRS identify the owners of digital “wallets” that users employ to store their virtual currency.
Unfortunately, making a Lot of Money has historically been a Red Flag for the IRS. The odds of an audit increase dramatically as the reporting Taxpayer’s income increases. Report $1 million or more of income? There’s a one-in-12 chance that the Taxpayer’s return will be audited. The more income is shown on the Taxpayer’s Tax Return, the more likely it is that they will be hearing from the IRS.
Don’t be a victim of your own making
Taxpayers ought to be as accurate as possible when filing their tax returns. Taxpayers want to avoid oversights and or mistakes that could raise IRS awareness. Taxpayers might need specific specialized tax advice that only a qualified tax specialist can provide.