Navigating the complex world of income tax resolution is a critical aspect of a tax professional’s role, as your clients rely on your expertise to guide them through challenging tax situations. To effectively assist your clients, it’s essential to recognize the potential red flags that may trigger IRS scrutiny or complicate the resolution process. In this comprehensive article, we will explore the various pitfalls and warning signs associated with income tax resolution, equipping you with the knowledge to proactively address these issues and deliver successful outcomes for your clients. By staying informed and vigilant, you can bolster your tax resolution practice’s reputation for excellence and secure the trust of your clientele.
Just because the Internal Revenue Service hasn’t contacted some of your clients who made erroneous claims for refunds or credits doesn’t mean they won’t be in touch in the future. If those folks think they are safe because they flew under the radar, you may want to remind them they could still be in jeopardy. The IRS can audit returns up to three years old.
That is a scary thought for taxpayers who purposely or inadvertently shuffled through inaccuracies on their tax forms. If they’re caught, they’ll get more than a slap on the hand.
Red flags pointing to inaccurate claims could lead to penalty charges of 20% of the disallowed amount. It the tax return is deemed to be frivolous because there isn’t enough information, they could face a penalty of $5,000. In more serious cases, such as tax fraudulent returns or cases of tax evasion, taxpayers can face criminal charges.
The good news is the IRS audited only about 1% of tax returns last year. But just in case, here are a few examples of red flags to avoid:
#1 Excessive Philanthropic Claims
A fair amount of deductions for charitable contributions will likely go unnoticed. However, if a taxpayer takes higher-than-average deductions for donations in relation to his/her income, the IRS is likely to take notice. The same goes for real estate interest or student loan interest. Any of these can lead to an audit.
For instance, if the taxpayer earned $150,000 and claimed $60,000 in charitable contributions, the IRS will certainly want to take a look. Does that mean there are not philanthropists who are that generous?
No. It means they’d better be able to prove it in case of an audit.
Save receipts and store them carefully.
#2 A Sudden and Extreme Load of Business Expenses
Before we get into this potential red flag, a business owner should absolutely track and claim every potentially reimbursable business expense. Stay organized by noting all of your expenses and track with an expense report. Just because you write “business” on the back of all your restaurant receipts doesn’t mean you’ll slide by in an IRS audit. Track carefully and offer a few details.
#3 Are You a Business Owner or Hobbyist?
Taxpayers need to be sure they know the difference between a business and a hobby. The IRS knows, and it allows hobby deductions up to the amount of income generated by the hobby.
For instance, if the taxpayer makes jewelry, they might have a side hustle selling a few items around the holidays. The IRS will allow deductions for material costs and expenses, but only up to the amount of income earned.
Are you confident that you can help your clients steer clear of the IRS at tax time?
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By making sure your retired clients understand the new laws and are paying enough tax during the year you’ll both avoid a big surprise when you least need it next tax season.