What to do in case your tax return is flagged by the IRS?

This tax season could be even less fun for many filers.

Aside from asking how Covid’s relief might affect their return, these complications could lead to more taxpayers making mistakes and hearing from the IRS, experts say. And depending on the specifics, this could mean a smaller refund or a larger amount due than expected.

“The world has been turned upside down,” said Henry Grzes, senior manager of tax practice and ethics at the American Institute of CPAs.

“You have things that you normally wouldn’t have, like stimulus payments, or who should have got them but didn’t or think they should,” Grzes said. “It will definitely be a challenging year for taxpayers, no doubt about that.”

While most people never get audited – only 0.15% were audited in fiscal 2019 – there are other types of IRS inquiries such as: B. A notice of discrepancies in income reporting and the proposed additional tax due. These things fall short of an official review, which the IRS can typically initiate three years after the disputed return is filed.

This means you can still hear from the IRS. And if the agency looks at part of your return, the rest is fair game.

It will undoubtedly be a challenging year for taxpayers, no doubt about that.

Henry Grzes

Senior Manager, Tax Practice and Ethics, American Institute of CPAs

“They may just say that everything else looks fine, but they certainly have the right to ask for reasons for everything [of a return]”Said Grzes.

In fiscal 2019, the IRS raised more than $ 121 billion in unpaid assessments for returns with additional tax due.

This year the IRS will process an estimated 150 million returns, with the standard filing deadline of April 15th. The agency started accepting returns on Friday.

2020 income tax brackets

IRS

Here are some general things that might lead the IRS to take a closer look at your 2020 return.

Unreported income

One surefire way for your tax return to get the attention of the IRS is to have a discrepancy between the income you reported and the information that the agency has.

Any forms that you receive with the income also go to the IRS. This could be a W-2 from work, a 1099-NEC, or a similar form showing income earned as an independent contractor, a 1099-INT with taxable interest of $ 10 or more in a bank account, or a 1099-G with an unemployment income (yes), it is taxable and you have to report it).

And if you don’t report any of these earnings, hear from the agency – the discrepancy creates an automatic letter.

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Also for the cryptocurrency investors out there, don’t forget that whether or not you get a form from a cryptocurrency exchange, you should report your profits (and losses) to Bitcoin and its brethren.

“The rule is that even if you didn’t get a 1099, it should be reported,” Grzes said. “Some people get the wrong impression that cryptocurrency is not taxable.”

Additionally, if you received a Form 1095-A that lists the tax credits received in 2020 for an insurance plan through your state’s federal health authority or your state’s marketplace, please note that the IRS will also receive a copy. In other words, you need to take this into account when you return.

Charitable deductions

For 2020 tax returns, taxpayers can make an above-the-line deduction of up to $ 300 for qualified charitable giving that lowers taxable income with no listing required. (Most people take the standard deduction, which is $ 12,400 for individuals or $ 24,800 for married couples).

If you are listing deductions and those write-offs include donations, be aware that the IRS knows how much taxpayers typically donate at different income levels. If your charity contribution deduction is high relative to your income or relative to your income colleagues, look out for it.

“If you have an income of $ 100,000 but have $ 80,000 in contributions, that is clearly going to raise questions,” Grzes said. “You may have just inherited money that is not taxable and wanted to give away a lot, but at first glance it won’t be junk.”

Of course, as long as you have the records to secure your donations, you shouldn’t be afraid to hear from the IRS.

For your 2020 return, you can make a cash donation to a qualified charity worth up to 100% of your Adjusted Gross Income. (This is a one-year adjustment from the usual limit of 60% of the AGI.)

Other types of property donated are also limited, depending on the type of asset and organization to which it is given.

Business expenses

If you own a business or are an independent contractor, the IRS can help you deduct legitimate expenses from your income. And if you use a space in your house exclusively for work, you can claim the allowance for the home office (full-time employees who do telework do not receive this tax break).

Some taxpayers opt for a simplified home office deduction based on the area of ​​their workspace, while others charge certain deductible costs, such as: B. a portion of your home’s utility bills, mortgage interest, taxes, etc. To the extent that it is used for business purposes, a deduction can also be generated.

However, accountants say they saw where receipts that are counted as deductions clearly indicate items that are not business related. Or the amounts they deduct from their business never change.

“I’ve seen numbers filed by taxpayers and it seems like they photocopied all of these expenses from last year,” said Rhonda Collins, director of tax content and government relations for the National Association of Tax Professionals.

“For example, are your utility bills exactly the same every year? If there are no year-to-year variations and the IRS compares them, that could be a trigger too,” Collins said.

However, if you have the documentation to secure your business expenses, then you should be clear about whether the IRS is looking for evidence.

High rental losses

While it is perfectly justified to write off expenses against rental income like any business, heavy losses can trigger IRS interest, especially if it’s a persistent pattern, Collins said.

Rents seem to be where people try to write off a lot of cash bills, but they can’t really prove the expenses when scrutinized.

Rhonda Collins

Director of Tax Content and Government Relations for the National Association of Tax Professionals

“Rentals seem like the place people try to write off a lot of cash bills, but they can’t really prove the expense when they’re audited,” said Collins.

As with any business you run, your personal cell phone is unlikely to be used solely for work purposes. Only the part used for business purposes counts as a tax expense.

Earned Income Tax Credit

This credit is generally available to working taxpayers with children provided they meet income limits and other requirements. Some low-income earners without children may also be eligible.

Because it is refundable – which means it can be refundable even if your tax burden is zero – it is considered valuable to working parents on low or modest incomes.

However, returns that claim this are generally more scrutinized due to abuse by some taxpayers. Even if you have a legitimate claim to the credit, your return can set a red flag.

“If you claimed one child last year and four this year, it could get the IRS’s attention,” Collins said. “Of course it could be true – you could have married someone with three children.”

The bottom line is that you should never try to cheat your taxes, experts say.

“If you’re telling the truth, you don’t have to worry about it,” said Grzes of the American Institute of CPAs. “It’s the people who don’t always do this that get in trouble.”

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