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Took the Extension and Still Need to File? Avoid Red Flags in Your Tax Returns

At Patrick & Robinson CPAs, we strongly encourage our clients to report honestly and accurately on their business and individual income tax return. After all, you and we both signed your tax return under penalty of perjury!

Many people, though, admit they enhanced the truth in their tax bookkeeping, perhaps only slightly to improve their tax debt. Many may estimate numbers because the actual amounts are too hard to determine.

CNNMoney polled three former IRS Revenue Agents who performed individual audits, but now serve as independent tax advisors, to learn from their experiences:

Business, charitable or medical mileage: you must base these deductions on actual miles, noted in contemporaneous records. Creating these records long after a trip is extremely difficult and often not very credible, while maintaining such records can be as simple as regular notations on your calendar. Consider downloading an app that links to a GPS tracker. A helpful spreadsheet is also available on the Patrick & Robinson CPAs website.

Charitable contributions: cash donations of $250 or more to a single charity require a properly prepared receipt from that Sec. 501c3 organization, before you file your return. You cannot later obtain a receipt with a date after the tax year involved. Donations below $250 only require your proof of payment.

Non-cash donations: clothing, toys and books always require a receipt, but your estimate of value (based on credible sources) is sufficient. If the gifts total more than $500 in a year, you must provide a Form 8283 with the name and address of each charity and a description of the donated goods. If any item is valued at more than $2,500, the charity must sign the form. In addition, major non-cash donations often require an appraisal to confirm the value.

Home offices: despite this topic becoming less controversial recently, you still must adhere to these rules:

  • Your home office must exist because you don’t have another appropriate place to do your work;
  • If you’re an employee, you’re using your home office because your boss asked you to regularly work at home; and
  • The office space must be dedicated full time to the business-related work, unless it relates to inventory or a child care facility. Since 2013, the safe harbor method helped many taxpayers keep records more easily for this deduction.

Independent contractors’ write-offs: don’t assume you enjoy a free pass for deductions in this circumstance! The rules on qualifications and the documentation required are tight. Expenses must relate to the business activity and you must use a bookkeeping system. A box of receipts for gas, donuts and office supplies doesn’t qualify. The basic “who, when, where, why and how much” rules apply to each purchase.

Rental property: the expense documentation rules apply here as they do with the self-employed business owner, especially when you’re a smaller landlord. If your primary source of income results from employment elsewhere, you can deduct only expenses directly related to the support and maintenance of the property. Also, know the rules for deducting property depreciation, which are not only important in the current year, and the accumulation of that expense when the property is sold can be even more important.

Gambling losses: gambling winnings more than $1,200 will likely result in a W-2G for that income. Any amounts less than that you must track and report on your own. All winnings are taxable, of course, and remember: the IRS knows you’re highly unlikely to win only large amounts. All your losses are deductible, but you must document them. Losses are limited as part of your miscellaneous deductions and cannot exceed the reported winnings.

Other red flags include claiming deductions well outside the published average ranges and reporting flat hundred or thousand dollar amounts. No one spends exactly $1,000 on office supplies or drives an even 20,000 miles with business miles of 14,000 in a year (also, don’t exceed the total on your odometer).

Let’s be honest…really. Filing with 100% accuracy takes time, but facing an IRS exam with weak facts is worse. A claim lacking strong documentation may result in jail time.

Need assistance completing an accurate return? Contact the experienced tax accountant team at Patrick & Robinson CPAs for help on how to best support those valuable deductions: Office@CPAsite.com or 904-396-5400.

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