Simple steps to reduce chances of run-ins with the IRS
As 2014’s tax season commences, many people are busy preparing income tax returns. A common fear among taxpayers is that they will get audited. While the I.R.S. audits less than 1 percent of the total number of tax returns each year, there are certain things that will flag a tax return for an audit. Avoiding some common missteps will lessen the likelihood that a person will be audited by the I.R.S.
Consider everything income
The I.R.S. has a very inclusive definition of income, and all income is subject to tax. In addition to the money a person earns from his or her job, income also includes a number of things such as tips, lottery winnings, gambling winnings, forgiven debt and earnings from self employment. People need to be sure to report all their sources of income. In many cases, people will receive Forms 1099 for sources of income that are not from their primary employment in January. The I.R.S. also receives copies of Forms 1099, which means that if people do not report the income listed on those forms, the I.R.S. is likely to audit a return to see what else a taxpayer omitted from the return.
Make deductions carefully
The I.R.S. tends to scrutinize tax returns more carefully when a person claims unusually high deductions compared to income. The general rule from the I.R.S. is that a person may deduct up to half of his or her adjusted gross income. However, rules governing deductions are complex. People need to be prepared to provide proof of every deduction they claim.
Use caution with foreign accounts
In 2011, the I.R.S. began to heighten its scrutiny of offshore accounts, looking for those who were trying to hide assets overseas. People with foreign assets need to realize that those assets may generate income and must report that income – even though there will not be a Form 1099 delivered to them. Additionally, those who hold over $10,000 in foreign assets need to file a form called an FBAR in addition to their tax returns.
Use professional help
Those who have questions about preparing their tax returns should seek advice from professionals who have a thorough understanding of tax laws in order to avoid potential mistakes that could lead to an audit. Those who are facing I.R.S. audits should speak with a skilled tax audit attorney to represent them during the process. Audits easily spill into other matters if people do not handle them carefully. If you have questions about tax audits, talk to an audit defense attorney for guidance.