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I will own the fact that I have been preparing tax returns for more than 40 years, and I’ve seen some really interesting tax returns.
During my career, I have probably represented clients in IRS examinations, or audits, more than 150 times. Although a variety of red flags might attract attention by the IRS, there are a few mistakes in particular that are almost guaranteed to prompt an audit.
Buying the box
The box is a software package that might literally come in a box, but is often “cloud-based.” And why is the “box” a problem? Because many taxpayers let the software “take over” the tax preparation.
The software is merely a tool. The user still needs to understand terminology and has to review the results.
Let me give you an example. A client received payments for services from a technology company. Although the technology company did not issue the taxpayer a Form 1099, the taxpayer knew that the $53,000 he received was income.
When he used the “box” to prepare his return, he somehow added the $53,000 into wages received from another source — a governmental agency that does NOT participate in the Social Security system.
So, while the income was reported on his 2016 tax return, he inadvertently ignored his responsibility for Self-Employment Tax (Social Security and Medicare).
I am confident that the taxpayer will be contacted by IRS regarding that omission.
Hiring the WRONG tax preparer
The IRS has long supported the preparer community and encourages taxpayers to perform due diligence when selecting a preparer.
The IRS has published information (available through their website at www.irs.gov) in Pub 4445-G “How to Select a Tax Preparer.” The IRS has information about preparers, and if a preparer is identified as a problem, it is possible that the IRS will examine all the returns prepared by that individual.
ProcrastinatingWhen taxpayers wait until the last possible minute to meet the due date, bad things happen. We had to amend a return that a client filed hurriedly by themselves, where they missed adding $30,000 of improvements to a rental property, costing the client an extra $10,000 in taxes!
Rushing is not helpful to anyone — systems break down, taxpayers can’t find paperwork, and the mess attracts attention at the IRS.
This is a big no-no. Sometimes taxpayers ignore those pesky Forms 1099 that come from banks, brokerage houses and payers for services. They may believe the information is incorrect, so rather than investigating they simply store the paper and file their tax return without it. Or, in the case of a brokerage house, they know they lost money on stock transactions, so they simply leave them off their tax return.
Worse yet, the taxpayer may have done some side work, given their Social Security number to the company and then filed their tax return without including the income because they “never got a piece of paper” — like the Form 1099.
It almost always ends in a letter from the IRS.
Fran Coet is founder and owner of Coet2 CPAs in Westminster, www.Coet2.com.
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