Tax season 2021: what in your tax return might alert the IRS

This tax season can be challenging. Experts say that in addition to figuring out how coronavirus financial aid could affect tax refunds, more taxpayers will make mistakes and receive audit notices from the IRS. In some cases, this may mean a lower refund or a higher amount of taxes than anticipated. Writes about it CNBC.

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“Everyone’s world has been turned upside down,” said Henry Grzes, lead manager of tax practice and ethics at the American Institute of CPAs. — We added something that we usually didn’t receive: for example, incentive payments. Without a doubt, this will be a challenging year for taxpayers.”

While most people will never face an audit—only 0,15% were audited in fiscal year 2019—there are other types of IRS requests, such as a notice of income reporting discrepancy or a proposed additional tax. This does not involve a formal audit, which the IRS typically has three years after filing a disputed return to request.

Here are some general points that may prompt the IRS to take a closer look at your 2020 tax return.

Unreported income

One surefire way to bring your tax return to the attention of the IRS is if there is a discrepancy between the income you report and the information the agency has.

All forms you receive showing income are also sent to the IRS. This can be a W-2 from work, 1099-NEC or similar form showing income earned as an independent contractor, 1099-INT showing taxable interest of $ 10 or more in bank account, or 1099-G showing unemployment income (yes, this income is tax deductible and you must report it).

And if you haven't reported any of these incomes, you'll hear from the agency—an automatic discrepancy letter will be sent.

If you invest in cryptocurrency, do not forget that you must report your gains (and losses) on Bitcoin and its cousins, regardless of whether you received the form from the crypto exchange or not.

“The rule is that even if you didn’t receive a 1099, you should report it,” Grzes said. “Some people mistakenly believe that cryptocurrency is not subject to tax.”

In addition, if you received a Form 1095-A that lists premium tax credits received in 2020 from an insurance plan through the FHC or your state market, be aware that the IRS will also receive a copy. You must reflect this in your declaration.

On the subject: IRS Starts Accepting Tax Returns for 2020: Timing, Deductions and Details to Know

Charitable contributions

In 2020 tax returns, taxpayers can make an over-limit deduction that lowers taxable income of up to $ 300 for qualified charitable cash donations without having to list them. (Most people take the standard deduction, which is $ 12 for individuals or $ 400 for married couples.)

If you do itemize deductions and those write-offs include donations, keep in mind that the IRS knows how much taxpayers at different income levels typically donate. So if your charitable contributions are too high for your income or relative to your income peers, be careful.

“If your income is $100 but you list charitable contributions of $000, that will obviously raise questions,” Grzes said.

Of course, if you have documentation to prove your donations, you shouldn't be afraid of problems with the IRS.

A monetary donation to a qualified charity of up to 2020% of your adjusted gross income is permissible for the 100 return. (This is a one-year adjustment from the usual 60% AGI limit.)

Other types of donated property also have limitations depending on the type of asset and the organization to which it is transferred.

Business expenses

If you own a business or act as an independent contractor, the IRS allows you to deduct the costs from your taxable income. And if you only use space in your home for work, you can take advantage of the home office deduction (people working remotely do not receive these tax benefits).

Some taxpayers choose the simplified home office deduction based on the size of their workspace, others calculate specific costs to deduct, such as a portion of utility bills, mortgage interest, taxes, etc. to the extent that it is used to conduct business.

However, tax officials say they have seen non-business items clearly visible on deduction receipts. Or the amounts people deduct for their business never change.

“I've seen the numbers submitted by taxpayers, and it seems like they just copied all the expenses from the previous year,” said Rhonda Collins, director of tax and government relations for the National Association of Tax Professionals. “For example, are your utility bills really the same every year?” If there is no change from year to year and the IRS compares this data, that could also be a red flag.”

For example, as with any other business you work for, your personal mobile phone is probably not used exclusively for professional purposes. Only the portion that is used for the business is considered a tax deductible expense.

Again, as long as you have the documentation to prove your business expenses, you should be fine.

High rental costs

According to Collins, while writing off rental costs (major and minor repairs, etc.) is perfectly justified, as in any business, too high losses can generate interest in the IRS, especially if they are repeated, and not one-off.

“Renting is one area where people try to write off a lot of cash expenses, but they can't really prove those expenses in the event of a tax audit,” Collins said.

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Earned Income Tax Credit

This loan is usually granted to working taxpayers with children if they meet income limits and other requirements. Some people with low income and no children may also be eligible.

Because it's refundable—meaning it can result in you receiving money even if your tax balance for the year is zero—it's a favorite among working parents with low or modest incomes.

However, the declarations in which the request for this loan is indicated, as a rule, are checked more closely due to abuse. Even if you are legally eligible for this loan, your tax return can get the IRS scrutiny.

“If you claimed one child last year and claim four this year, that could attract the attention of the IRS,” Collins said. “Of course, that could be true—you could marry someone who has three children.”

The bottom line is that, according to experts, you should never try to cheat the IRS.

“If you're telling the truth, you have nothing to worry about,” said Grzes of the American Institute of CPAs. “The problems come from people who don’t always do that.”

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