(Bloomberg) — Americans who put their 2021 taxes on hold have less than a week to file a return or extension — and fill them out correctly to avoid trouble with the Internal Revenue Service.
Audits are a risk everyone should pay attention to, but especially those with the lowest incomes. According to data from the Transactional Records Access Clearinghouse at Syracuse University, the IRS looked at its returns in fiscal year 2021 at a rate five times higher than all other taxpayers.
Chances of being targeted remain low: Four out of every 1,000 returns filed were audited by the IRS in 2021, and audit rates have declined over the past decade.
Still, an increase in audits for those earning less than $25,000 has set off alarm bells on Capitol Hill, with congressional Democrats calling on the IRS to address the agency’s reliance on correspondence audits—exams by mail. – to operate them.
Read more: Democrats ask the IRS why tax audits for the poor have doubled
According to experts, this year, changes in eligibility for credit, deductions that have become more common during the pandemic and cryptocurrency activity, could trigger audits.
Here are the major pitfalls to avoid for last-minute tax filing:
It sounds obvious, but filing accurate returns is the best way to avoid audits, said Jamie Block, a senior wealth advisor at Mercer Advisors. The agency receives information about payments from employers, including 1099 and W-2 forms, and any mismatch can trigger a flag.
Common mistakes include accidentally transposing digits or typing in the wrong line. Depending on the numbers, this can create a huge discrepancy even for those with modest incomes.
“For lack of a better word, a taxpayer can’t very much manipulate those types of income, because the IRS already has that information,” said Henry Grays, principal manager of tax practice and ethics. American Institute of CPA.
He said tax officials are generally more likely to look into returns with self-employed or rental properties because they don’t necessarily have a record of that income.
For those with self-reporting income, using a larger, rounder amount to deduct can trigger a notice, said Anil Melwani, partner at Tanton Grubman CPA. Self-employed individuals should line up for total income and expenditure.
“They’re pretty much thinking, ‘Oh, this guy threw a bunch of numbers together and probably didn’t really add stuff to QuickBooks or Excel,’ they guessed it, and they likely have a lot of evidence. less,’ he said.
Another red flag is showing little income or many years of loss in a sole proprietorship. According to Melvani, in that case, the agency may wonder whether the business is legitimate or should be classified as a hobby without similar write-offs.
“They don’t necessarily attack it immediately,” he said. “But if you don’t show any income or loss for three consecutive years, he can do that.”
Hyperbolic Home Office, Charity
While more Americans will work from home in 2021, not everyone qualifies for the home-office deduction.
Maintaining a home office should be for your employer’s convenience and used exclusively for work, Graze said.
“Using your kitchen table or dining room table is not going to meet that test,” he said. “To say, ‘Well, I’m using my kitchen as my home office, and I have seven rooms in my house, and so I’m going to take one-seventh of all my expenses and claim Do that as a deduction on my business, ‘That probably won’t work.’
Unreasonable charitable deductions also cause audit flags, Block said.
While the IRS has raised the limit for claiming charitable deductions from 60% to 100% of an individual’s adjusted gross income, it still requires documentation from each charitable person for donations over $250.
“Under audit, you need to provide confirmation,” she said. “If you don’t have those, too bad for you, you lose that deduction.”
don’t hide crypto
Cryptocurrency is front and center on tax returns, with an essential question asking taxpayers whether they have made any sale or exchange of virtual currency. Taxable transactions must be reported along with capital gains or losses.
“If you don’t answer, and there’s evidence that you have a transaction, then obviously it’s going to be a trigger,” Grays said. “Even if you answer yes, and you don’t report them, it’s clearly going to be a trigger.”
Melvani said that many large cryptocurrency transactions are likely to be watched closely.
“We have to see how much they actually move and how they have trained their computer programs, because a lot of these return scans are being done,” he said. “They don’t have the human resources to go on paper.”
child tax credit
Under the 2021 American Rescue Plan, eligible taxpayers received an advance payment of up to half of the annual Child Tax Credit. Advance payments were directed based on previous tax returns, information entered for incentive payments, or details sent directly to the agency.
On this year’s return, those receiving advance payments will need to be matched against admissible credit. If circumstances have changed, such as family income, your taxes may be accounted for and the credit may be reduced.
Melvani added that if you’re not married or filing separately from a co-parent, only one person can claim the child for deduction on your tax bill.
“Anyone who claims the child is going to get that benefit, but you can’t really share that deduction,” he said. If both parents claim the child, it can also result in an audit.
earned income tax credit
This year, more workers without children may qualify for the Earned Income Tax Credit, one of the biggest benefits for low- to middle-income families. This includes employees who are at least 19 years old with income less than $21,340 (as a single filer) and investment income of up to $10,000.
“It really affects a lot of older individuals who are working part-time, and don’t have a lot of investment income,” said Block, who saw more clients eligible for credit than in the past.
Salaried earners in this category are most likely to be audited, as the Syracuse data shows. More than half of all correspondence audits last year targeted returns with gross receipts of less than $25,000, claiming the earned income tax credit.
To avoid audits, make sure both earned income and investment income fall within the limits set by the IRS, Block said.
For extension filers: This is a request for additional time for filing tax returns, not more time for paying taxes. Individuals should take an estimate and pay the dues by the April 18 deadline.
To contact the author of this story:
Jill Shah in New York [email protected]