Tax season has begun and everyone is scurrying around to get their tax returns filed as quickly as possible. Many are hoping to get a refund which may just be the extra cash they need to help them through the year. However, in this hurry many mistakes are made which can result in an audit down the road. In order to help avoid this problem here are 7 things you must NOT do when you file your income tax returns.
- Do not use a tax preparer who is not licensed in your state or who does not have a tax license: with IRS’ new program to crack down on unlicensed preparers it is likely your return will be flagged for audit if the person you use does not have a license. Many of us may be using preparers that are licensed but are not licensed to do business in their particular state.
- Do not file an extension if you owe on your taxes: An extension is an extension of time to file and not an extension of time to pay. If you fail to file your taxes and you owe when you do file you are going to get hit with hefty penalties and interest further causing your return to be scrutinized for an audit. The best thing to do is to file your taxes on time and then set up a payment plan or make some type of financial arrangement with the IRS or your state revenue department.
- Do not fail to file electronically. Filing electronically is the smartest and the most efficient way to file your taxes these days. Most electronic filing software that is professional grade will do a review of your return to make sure nothing is missing prior to filing. This will give you an opportunity to check for errors prior to the IRS getting your tax return. Returns that are manually filed through the mail are open to more scrutiny than those that are submitted electronically. If you have to mail in your return, be sure to send your paper return via certified mail.
- Do not take a business loss for more than three years in a row: As the IRS is continuing to crack down on taxpayers audits are on the rise. If you have a business loss and this is your fourth year the IRS may come in and audit you and disallow your business loss. Be smart and make sure you are able to prove that your business is growing even though it is a loss. Be sure you are proving that you are advertising and improving your current market share. Ultimately the IRS is looking for time devoted to your business and if you have a true economic reason for getting your business to a profit versus looking for a shelter from taxes.
- Do not forget to keep receipts. This one should be simple, but it is not. In a push to not keep paper around many of you are shredding your receipts and hoping to later secure documents from the bank. The banks are charging taxpayers big sums of money to go back and get documents including old cancelled checks and old bank statements. Keep the original documents or securing electronic versions may be a good idea to avoid this situation.
- Do not forget to report forgiven debt. If you’ve had some debt forgiven in the last tax year, the debtor will have reported it on a 1099-C. That counts as income and you will need to pay taxes on it. Many of you may not have received your 1099C’s for debt cancellation but these amounts are still reported as income on your tax return. Forgetting to report this income is a good reason to flag your return for audit.
- Do not forget to report stock sales or distributions from IRA’s that happened early in the year: Notoriously every year a lot of the big financial institutions will fail to send taxpayers their 1099 forms reporting their stock sales or distributions from their IRA’s by January 31st. Many of these forms will not come out until February 28th. Taxpayers then go file their tax returns without this information causing the IRS to send to you a CP 2000 notice. This notice is a letter from IRS stating you did not report all your income on your tax return. You can amend your return and claim the appropriate income and expense but the problem is this has now flagged your return for a potential audit. Audits are what we are all trying to avoid.