Posted by: Sandy Botkin, CPA, Esq.
Updated: January 15, 2019
Tax season is upon us! Let’s face it…preparing your tax return isn’t fun. As a result of all of the “tax reform” and “tax simplification” laws, filing a return today is more complicated and stressful than ever (the word “tax” is in the word “taxing” for a reason). Even worse, the error rate of filed returns is very high. In my experience, most people would not withstand a close scrutiny of their returns. Below are five tax tips you can use to make it simpler than ever to file your tax return this year.
1. Assume you will be audited every year. Although audits have been greatly reduced as a result of IRS budget cuts, self-employed individuals have a higher chance of being audited than employees. If you assume you will be audited each year when you prepare and file your return, you will be more prepared if the IRS comes knocking at your door. Have receipts for everything noted on your tax return, and be sure you have picked up all of your income. Don’t forget the income reported to you and the IRS on the 1099 forms that you get from your broker, bank, and corporations. The IRS matches the income reported to them against your return, so leaving any income out is a great way to get flagged.
2. Always file your tax return electronically or use a tracking service to send it to the IRS. When the IRS doesn’t get a tax return from you, it sends a big red flag for them to inquire what happened. This is like putting a big red flag in front of a bull (and we all know how that ends). Thus, I strongly recommend you either send your return electronically (the best way) or use either Federal Express® or UPS® tracking. I have seen cases where the courts will waive penalties when the taxpayer can prove they sent the return to the right address, even if it was never received by the government.
3. Always check that you signed your tax return and attach the correct forms. It’s amazing how many people fail to sign their tax return or don’t file the correct forms. These are two of the top red flags for an audit according to the IRS. Failing to report all of your income is another major flag.
4. Attach a schedule explaining big-ticket items. Here is a tip that I would bet your accountant never told you. You are allowed to attach a schedule or statement explaining anything on your tax return. This could greatly reduce your chance of an audit. Here is an example: There was a couple who claimed $25,000 worth of dental expenses as a medical expense deduction. Sounds high, right? It caused an audit. What if I told you this bill was for braces for three kids and dental implants for both spouses? That doesn’t sound as bad. Had this couple attached a statement showing the services that comprised the $25,000 of dental expenses, with an itemization of these expenses, they likely wouldn’t have been audited.
5. Absolutely get a tax tracker. I often get asked what self-employed people and employees who need to account for their expenses can do in order to bulletproof their tax return from the IRS and state. The answer, according to the IRS, is to have a tax tracker. A tax tracking system can be a written log associated with paper receipts and documentation, or an application found on your smart phone. It should have the following:
I. A mileage log integrated with a GPS system. It would be best if the tracker automatically turned itself on and off when you make a business stop so you don’t forget to turn it on. It should show both the business and personal mileage, as well as the address of each stop and an explanation for each business stop. Simply noting that a stop was made for business or personal reasons isn’t enough and is not tax compliant.
II. It should have an expense log showing all the tax questions required for the deductions. For example, entertainment should show: • Who was entertained? • What type of entertainment was involved (e.g., business gift, meals, etc.)? • What was discussed with some degree of specificity? • What was the date of the entertainment and business discussion? • Where did the entertainment occur? • How much was the entertainment? Again, simply showing the amount and place of the entertainment isn’t enough.
III. A good tracker should also have an integrated camera for you to take pictures of receipts. IRS and most state tax authorities will accept digitized documentation, especially after seeing all of the lost records due to Hurricane Sandy.
IV. A good tax tracker should have educational tips and tools for tax planning and compliance. Knowledge can be crucial when filing taxes, and one idea can save you thousands of dollars. In fact, we have seen that simply keeping track of your expenses can save you significant money in otherwise lost deductions.
V. A good tax tracker should have easily accessible reports that you can send to your accountant via email or memory stick.
Bottom Line: Tax season doesn’t have to be a headache. Even audits can become more efficient as a result of proper planning. Following these five tips will make your life simpler and less “taxing.”
Sandy Botkin, CPA, Esq. is the author of Lower Your Taxes: Big Time and Achieve Financial Freedom: Big Time. She is also the founder of Taxbot, one of the simplest and best expense and mileage trackers available. Visit www.taxbot.com and get a free 15-day trial.