1. E-FILE. When you e-file, your chance of getting an error notice from the IRS is significantly reduced.
Besides, it’s faster. Your refunds also arrive sooner.
2. Check your occupation. Your occupation must be consistent with your income and expenses. It does not make sense for a waiter or hairdresser not to report any tips. So is an investor with no interest or dividend income.
3. Dependent of another. Don’t claim a dependent relative without verifying with child’s parents. IRS computers automatically tract and identify dependents who are claimed more than once.
4. Be careful with Earned Income Credit. This credit is refundable. It’s a breeding ground for abuse, as it has been for many years. It’s a source of fraud and IRS agents are so aware of it.
5. Report all income. IRS receives copies of 1099s and W2s from your work, bank, buyers – people who pay you. To miss a 1099 is flirting with IRS scrutiny. If you did not receive a 1099 from a company who paid you more that $600 last year, don’t assume that they did not send one to the IRS. If they did, you’ll get a notice of unreported income or even an audit letter if they find other items of interest in your tax return.
6. Forgiven debt. If you had debt relief from credit card debts, real estate foreclosure, abandonment, or short sale, lenders issue form 1099-A, 1099-C, or 1099-S. These forms are critical. We understand if you simply throw away these documents that remind you of unfortunate events. Don’t. These forms could lead to more trouble if ignored. An unreported 1099 with hundreds of thousands of dollars guarantee an IRS notice.
7. Do not estimate mortgage interest. Deduct exact amounts of mortgage interest that appear on form 1098. Don’t estimate. Form 1098 is reported to the IRS which matches amounts with your tax return. Caution: If your house loan is under somebody else’s name, don’t report it in the usual line 10 of Schedule A. Instead, deduct the interest on line 11 of Schedule A.
8. Do not attract attention to yourself by taking outrageous deductions. The trick is the opposite – submit a return that gets “lost” in the crowd. You stick out from the crowd if you claim donations that look big compared with your income or repairs of $10,000 on a building that generates gross rents of $12,000. That material expense could be a roof or room addition that should be capitalized. It could also mean small repairs that are lumped into one inviting number. Whatever it is, you draw attention to yourself. Bad idea. The idea is to get lost…, I mean, get lost in a crowd of taxpayers and disappear in a sea of returns.
9. Stay away from Schedule C – Income from business or profession. It’s a lightning rod for audits. Schedule C puts you at the top of the food chain for IRS consumption. Majority of audit cases that we handle come from Schedule Cs. Why? A big chunk of the “tax gap” is caused by sole proprietors. The government’s chances of collecting taxes, penalties, and interest from Schedule C audits are higher than the rest of the population.
10. Consider a corporation or LLC. Corporate risk of audit is about one tenth of a sole proprietor filing Schedule C. Recent studies estimate that 75% of Schedule Cs are not accurate. If you own rental real estate or a business, take issues out of your personal income tax into an LLC that can elect to file either as a corporation or partnership.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.
