Working as tax return preparation professionals in Houston can has allowed to see all sorts of credits, deductions, and more that are common and rare. However, no one wants an IRS tax agent knocking at their door and asking for a year’s worth of detailed receipts due to a tax return audit. While there is no surefire way to avoid one, you can greatly decrease the chances of that happening by avoiding these common pitfalls when it comes to filling out a tax return. Here a few tax return tips to help you do that.
1. Getting the Wrong Tax Return Preparer
This innocent mistake could happen before you even input your name onto the tax return. Choosing a tax return preparer who is incompetent or unethical could be a huge mistake. Their intentions may even be good and they may even be a friend who gives you a discount. The IRS will not care how good a deal you got. If they decide to audit one of your tax returns, it can cause you significant financial problems that will outweigh your savings. They may even decide to perform a tax return audit on every one that your preparer has turned in for the last several years.
2. Turning in Certain Forms or Schedules
If you own a business, you will need to file a Schedule C as part of your tax return. The sad truth is this form increases your odds of an audit. There is an IRS form dubbed Form 5213, Election to Postpone Determination as to Whether the Presumption Applies That an Activity is Engaged in for Profit. It is for individuals, estates, trusts, and corporations to elect to postpone an IRS audit. In short, it can prevent a tax return audit for the first five years of your business if you are transitioning from a hobby to a for profit activity. For example, if you play guitar and then decide to give lessons. It can be useful once accepted, however, the chances of an audit from the IRS once the five years are up are increased. To learn more about Form 5213, click here.
3. Filing for Questionable Credits or Deductions
Two of the most likely actions that can trigger an audit include excessive charitable contributions (especially non-monetary ones) and a home office claim. This is doubly dangerous when the taxpayer’s full or part time job is with a traditional employer.
Those who do contribute a large portion of their income to charity should keep meticulous records, such as the checks or other receipts. Too many contributions as a high percentage of your income can be a red flag. Even though the items you drop off at your local charity do have value, claiming the maximum value on a regular basis can cause issues to arise.
The Earned Income Tax Credit can also trigger a tax return audit, so be sure you are entitled to it before claiming it.
4. Rental Property Loss
A rental property can be a great way to earn a little extra monthly income, especially in a troubled housing market. Homeowners may have found at the end of the year that the rent collected wasn’t enough to cover expenses. The rent didn’t cover the mortgage, insurance, taxes, and other expenses associated with renting a property. The homeowner then assumed they were entitled to file for a deduction on the losses. You may only file for a deduction if you are an active participant in the management and maintenance of the rental or work as a real estate professional. The IRS has a long and confusing page with the details, but trust us – ask a tax return pro before taking this deduction.
Tax Return Audit in Houston
If you need help preparing a tax return in Houston and avoiding an audit, feel free contact us for help.