Here are the best practices when it comes to filing taxes to save you a headache
The approach of tax season can be a stressful time for many Americans. Studies show 1 in 4 Americans don’t understand how taxes work. Unsurprisingly, this leads to improper estimating or filing incorrectly.
It may surprise you to learn that the IRS has developed a system that flags suspicious tax filers so millions of returns can be processed quickly. This means that if you don’t file correctly, you’re more likely to get flagged by the IRS.
If you get flagged by the IRS, it’s not the end of the world! As long as you can provide proof of everything on your tax return and are paying taxes on everything, you won’t be charged with tax fraud.
With the automated system, thousands of Americans are being flagged for tax fraud even if they are paying their taxes correctly. In order to prevent this from occurring to you, we’ve compiled a list of tax filing mistakes you should avoid.
1. Be Sure to Report All Taxable Income
The top tip for filing your taxes is to be honest about your taxable income. Don’t lie or omit any income information on your federal tax returns.
This is the number one reason why people are flagged by the IRS. It’s vital to account for all taxable income even if you’re self-employed or do freelance work.
The IRS understands and will correct minor math errors, but you should never estimate or round down because you’ll be flagged. If you’re flagged by the IRS, it’s important to have all of your income forms handy.
2. Report Big Donations to Charity
Donating to charity and putting your money to good use is great, but sometimes it can raise eyebrows with the IRS. It’s imperative to be careful if you have a low taxable income and make large donations — it can be considered tax fraud.
To avoid trouble, make sure to report all donations by filing Form 8283 for any donation over $500.
Hot Tip: Charitable donations include religious donations as well, be sure to include all of your donations when filing your taxes.
3. Filing Business Expenses
Deductions can be claimed if you take business clients to expensive dinners or use a vehicle for business purposes. However, there’s a standard process that you’ll need to follow and guidelines for what qualifies as a business deduction.
When it comes to business dinners, it’s important to only file the essential expenses. The system may flag you if you try to deduct lavish meals and frivolous extras like champagne or concerts.
For vehicles, it’s very important that the vehicle is only used for business purposes. Keep all documentation with mileage records to back up your claims in the event you’re flagged.
If you use the vehicle for personal use at all, you’re probably unable to deduct it.
4. Home Office Tax Deductions
If you use part of your home for business purposes, you may be able to use it as a business deduction. But this can also cause problems as people can stretch what a home office means and get flagged by the system.
Be sure to check out IRS Publication 587. This document lists all of the requirements and a flow chart to help you identify what can be considered deductible.
A lot of the audit triggers are from deductions or tax amounts not adding up. To avoid this, be sure to keep all records and follow all IRS guidelines.
If you do get flagged, having records or proof will take care of it, never estimate or assume that you won’t be asked for additional information!