The audit rate of personal income taxes continues to be low, hovering at around 0.5% of all personal tax returns filed each year based upon the past few tax filing seasons.  However, the chance of being audited is real and the chance of receiving an IRS notice is more common than you may think.  Keeping good records and not forgetting to report taxable items on your tax return will help to minimize the risk of being the subject of an IRS audit or receiving a tax discrepancy notice.  With tax filing season just around the corner, we have compiled a list of “helpful hints” for taxpayers to follow when organizing their tax documents this winter to assist in reducing the risk of receiving one of those unwanted IRS letters.

Keys to minimize IRS Audit Red Flags

  1. Don’t report Schedule C collections that total less than the sum of all your 1099-NEC’s reported to you.
  2. Avoid reporting 3 consecutive years of losses on a Schedule C.
  3. Don’t be over aggressive reporting auto (100% business use), travel and meal expenses on your Schedule C.
  4. Avoid showing all tax-deductible expenses in round numbers ($X,000).
  5. Report all your cryptocurrency transactions (new on the IRS’s radar for 2020 tax returns).
  6. Report foreign investments owned as well as gifts and bequests received from foreign sources.

Keys to minimize IRS Tax Notices

  1. Be sure to report all W-2’s received.
  2. Don’t miss reporting stock sales reported on your year-end 1099-B.
  3. Keep accurate records of all your self-employment (1099-NEC) income – don’t miss reporting one on your tax return and under report total income received.
  4. Report your 1099-Q’s (qualified education distributions).
  5. Report Health Savings Account distributions, even if properly used for qualifying medical expenses (Form 1099-SA).
  6. Report the sale of your residence, even if the sale meets the capital gain exclusion rules (Form 1099-S).
  7. Correctly report your estimated tax payments.
!-- Global site tag (gtag.js) - Google Analytics --