5 steps to get off the IRS' naughty list
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Running afoul of the Internal Revenue Service is one of life’s least pleasant experiences. But there are steps one can take to help avoid being audited or fined by the IRS.
To begin with, experts say to steer clear of using perfectly round numbers repeatedly on your returns. The IRS will flag these numbers, increasing your chances of being audited. (Learn the big reason to file your taxes in January.)
Don’t try to hide any money you earned when filing your taxes. The IRS likely already knows about the income.
Tax law requires that companies and individuals report wages they pay out to the IRS as well as to you, the person receiving the pay. Whether the income is via salary or freelance check, the IRS has information about this income in its computers, says Ronald Leder, CEO of ezTaxReturn.com.
“If you have income that you don’t report, it’s a red flag for the IRS that could trigger an audit,” said Leder.
Even if you don’t receive a W-2 or 1099 for some income, it still must be reported, said Christopher Jervis, managing partner of Lone Wolf Financial Services.
“You’re responsible for reporting all of your taxable income, from all sources, regardless of whether someone else reported it or gave you a form for it,” said Jervis. “So, those cash tips? The under-the-table side jobs? Report them. The IRS uses sophisticated algorithms and databases to get a picture of what someone 'should' have made, and they will be looking for a corresponding tax return.”
The IRS knows many taxpayers who have a home-based business take advantage of the home office deduction without fully understanding the rules, says Leder.
“The rule is that you can only deduct the percentage of your home that you use for business and only business,” said Leder. “If you have a microwave in your office and you use it to re-heat your dinner, it’s likely part of your home, not your office and a deduction for the use of the space for business is disallowed.”
If you earn $50,000 annually, the IRS will find it curious if you donate $30,000 to charity, Leder says. He was being tongue-in-cheek, but seriously: You shouldn’t report donations you didn’t make or try to over-report donations.
“The average American taxpayer donates about 3% of his or her income. Anything more can make the IRS interested in an audit,” said Leder.
The IRS doesn’t like it when you owe them money, said Steven Rossman, a certified public accountant with Drucker & Scaccetti.
“If you don’t pay your taxes when they’re due, the IRS will issue notices. If the balances go unpaid for too long, the IRS can issue liens and levies and in extreme circumstances they can take your assets,” said Rossman. “You really want to stay ahead of the game by making estimated payments and if you’re an employee, make sure your federal withholding from your wages is appropriate to cover your tax liability.”
What’s more, one of the harshest penalties from the IRS is the failure to file penalty, said Charles Corsello Jr., co-founder of TaxDebtHelp.com.
“It amounts to 5% per month on any unpaid taxes. If you can't file on time, file an extension,” said Corsello. The best step anyone can take is to be honest on their taxes, he added. “Yes, this advice is simple, but it reduces the chances of being audited and fined.”
Want to dive deeper into your 2019 taxes? Read our walkthrough.
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