When it comes to our national pastime — no, I’m not talking about baseball, I’m talking about our love-hate (or sometimes hate-more, hate-less) relationships with Uncle Sam — the IRS is easily the most convenient target.
Yes, we acknowledge and appreciate — grudgingly or otherwise — the fact that if the IRS didn’t collect tax revenue, then we wouldn’t have public goods like roads, hospitals, schools, law enforcement, and so on. But at the same time, stories about of IRS agents overstepping their bounds. Plus, it’s widely known that the IRS is the largest and most powerful collection agency in the world, and their tactics can make credit card companies and other debtors seem tame by comparison.
Yet, it doesn’t matter if you view the IRS as wonderful, or as a necessary evil (or even just evil). The fact remains that if you break the rules, you can and likely will get into VERY big trouble — which means punitive fines and interest, plus potential criminal prosecution and incarceration.
Obviously, you’d prefer to love or hate the IRS from the freedom and convenience of your home vs. as a “guest” of the correctional system. To that end, here are 10 deadly tax filing sins according to experienced tax attorney Jeff Kahn, who is the principal of the Law Offices of Jeffrey B. Kahn and popular ESPN radio host where he talks about tax-related matters for individuals and businesses:
- Failing to report all of your earned income. It doesn’t matter of your employer or client fails to provide you with timely and/or accurate forms. It’s your responsibility to keep track of all earned income, and pay tax accordingly.
- Failing to report all of your unearned income (generally investment income).
- Failing to disclose all foreign funds and accounts.
- Exaggerating expenses to claim bigger deductions. Beware: Big Data Analytics has come to the IRS in the form of what’s called the “discriminant information function” or DIF. This tool uses an excessively complex algorithm to identify the average deduction for multiple types and classes of taxpayers.
- Inflating self-employee expenses. The DIF is just as interested in self-employed filers.
- Falsely deducting meals and entertainment as business expenses. This is low hanging fruit for the IRS’s computers, because it’s so easy to target taxpayers who are coloring outside the lines. Still, many filers try — and fail — to squeeze in that family excursion to Disney as a “business trip.”
- Not understanding the rules for deducting home office expenses. The IRS is clear on this, but a lot of taxpayers are fuzzy. Here’s the rule: to deduct home office expenses, the office in question must be used regularly and exclusively for business dealings. If you’re an employee with an office somewhere, even if you regularly work overtime and on the weekend at home, you can’t claim it as a home office.
- Using whole and rounded numbers. This is a bit strange, but according to Kahn the IRS is wary of returns that have an excess of whole, round numbers. Once in awhile this is fine, but if half or more of the numbers end in “00,” then the IRS starts to wonder if numbers are being guesstimated or exaggerated.
- Improperly claiming a dependent. This is a complicated area, and many taxpayers who aren’t trying to break the rules get tripped up here — and trigger an audit. Getting all of the facts is essential before filing.
- Manipulating business losses. Yes, it’s hard for new businesses to turn a profit. But the IRS is very suspicious — and usually with good reason — when a business exists for several years without making money. Generally, the IRS expects that a business should be in the black for three out of every five years.
The Bottom Line
If you’ve made any of the sins above, then don’t panic. Speak with an experienced tax attorney ASAP to discuss your options, including submitting an amendment to the IRS. Do not — repeat: do not — tap your account or tax preparer for help here. Anything you discuss won’t be protected by attorney-client privilege, and your attempt to smooth things out could make them much, much worse.