The No. 1 Reason You Could Get Audited by the IRS

Trying to file taxes can get confusing quickly due to a complex tax system filled with a seemingly endless number of requirements, exclusions, and exceptions that often change year to year. Taxpayers find the process so complicated that nearly 29 percent shell out hundreds to thousands of dollars every tax season to pay an accountant to file their returns, and around 35 percent use tax preparation software like TurboTax. But no matter how you file, the Internal Revenue Service (IRS) could still come knocking at your door to make sure everything you included on your return was correct. And with the potential for fines and criminal charges, the thought of getting audited by the IRS is enough to scare anyone.

Rest assured the tax agency doesn’t have time to conduct such a thorough examination of the millions of returns it receives every year, so it really all comes down to certain red flags. According to tax experts, there is one thing in particular that makes you more likely to be audited by the IRS. Read on to find out what mistake you’ll want to avoid when filing taxes this year.

You could get audited by the IRS for claiming too many deductions.

Deductions are enticing to taxpayers because they can reduce the amount of your income before you calculate the tax you owe, which in turn might significantly lower how much you have to pay in taxes or increase your refund. But that doesn’t mean you should go wild writing things off on your tax returns, as experts say claiming too many deductions is the most common reason people end up getting audited by the IRS.

“People sometimes over-claim tax deductions,” Samantha Hawrylack, a personal finance expert and co-founder of How to Fire, explains. “If you are not eligible for certain tax benefits, it is important that you don’t claim them because they will just lead to an audit.”

Don’t try writing off deductions that are no longer accepted by the IRS either. The tax code has changed over the years, and there are some things the tax agency no longer recognizes. “You should remember that some of the tax write-offs were terminated by the IRS, including deductions on alimony, moving expenses, and any expenses related to investing, hobbies, and tax preparation,” says Dmytro Serheeiv, a professional tax specialist and co-owner of PDFLiner.

It’s important to pay extra attention to specific deductions.

There are a number of deductions taxpayers can claim on their returns, from work-related and education deductions to itemized and health care deductions. But certain deductions are more likely to sound the alarm than others—even if you don’t feel like you’ve claimed too many. Sarah York, an enrolled agent with the IRS and an in-house tax expert, says that the home office deduction is a “write-off that people tend to abuse,” so your return is more likely to get flagged by the IRS if claims in this area seem excessive.

“For example, if you claim your office is 80 percent of your house, that’s probably too much,” she explains. “Claiming large gifts to charity on your itemized deductions is also likely to result in more scrutiny from the IRS.” Crystal Stranger, the international tax director for GBS and author of The Small Business Tax Guide, says that auto-based deductions are another big area of concern for the IRS. “Claiming large amounts of auto expenses is a big red flag for getting audited especially if there is hardly any income involved,” Stranger explains. “Auto expenses are only deductible for amounts used for business, not for commuting or other activities. Claiming 100 percent business deduction for autos is extremely rare.”

But you should take all the deductions you’re allowed to claim.

The fear of being audited might make you scared of deductions, but not taking any would be a mistake. The most frequently missed include charitable contributions, medical expenses, job-related expenses, student loan interest, and home office deductions, she says.

Taxpayers must keep track of their deductible expenses throughout the year to ensure they have the records they need once it comes time to file a return. If you are not sure what deductions are allowed, consult a professional.

While certain issues like claiming too many deductions can make you more likely to get audited by the IRS, “selection for an audit does not always suggest there’s a problem,” the tax agency notes. Some people are just randomly selected. If you are being audited by the IRS, the agency says they will notify you by mail. “We won’t initiate an audit by telephone,” the IRS says.

Article by Kali Coleman for Best Life©

Source: The No. 1 Reason You Could Get Audited by the IRS, Experts Warn (msn.com)

Here’s how long it will take to get your tax refund in 2022

© Getty Images/iStockphoto Tax refund

Treasury Department officials warned in January that this year’s tax season will be a challenge with the IRS starting to process returns on January 24. That’s largely due to the IRS’ sizable backlog of returns from 2021. As of December 31, the agency had 6 million unprocessed individual returns — a significant reduction from a backlog of 30 million in May, but far higher than the 1 million unprocessed returns that is more typical around the start of tax season. 

“IRS is in crisis, Taxpayer Advocate warns”

That may make taxpayers nervous about delays in 2022, but most Americans should get their refunds within 21 days of filing, according to the IRS. And some taxpayers are already reporting receiving their refunds, according to posts on social media. 

Getting refunds within 21 days of filing

If all goes well, though, taxpayers who e-file can receive their refunds via direct deposit as quickly as one week after filing based on previous years’ processing time, according to trade publication CPA Advisor. 

Ensuring smooth tax filing comes with a lot on the line, given that the average refund last year was about $2,800. Below are tips from tax experts and the IRS on how to get a tax refund within 21 days of filing.

1. File electronically

This is a step the IRS is strongly urging this year. Although some people may simply like filing paper returns — and others may have no choice — the agency says that taxpayers who file electronically are more likely to have their returns processed quickly. 

“Paper is the IRS’s Kryptonite, and the agency is still buried in it,” National Taxpayer Advocate Collins said  on Wednesday. 

2. Get a refund via direct deposit

The IRS also recommends that taxpayers arrange to get their refunds by direct deposit. The agency says the fastest way to get your money is to use the combination of e-filing with direct deposit, which sends the money into your bank account. 

3. Don’t guesstimate

The IRS checks its data against the figures taxpayers detail on their returns. If there’s a discrepancy — say your W2 shows that you earned $60,000, but you write on the return that you earned $58,000 — the return is flagged for manual review by an employee. 

Once that happens, it’s likely your tax return will face a delay of weeks or even months. That’s why tax experts advise people to check forms carefully to ensure they’re reporting data accurately. Filling out your tax return shouldn’t rely on “word of mouth or the honor system,” Cyr said. “I guarantee that will cause delays.”

4. Save IRS letters about stimulus, CTC

Along those lines, the IRS is sending letters this month to taxpayers who received the third federal stimulus check in 2021, as well as the advanced Child Tax Credit payments. 

These letters will inform each taxpayer what they received through these programs in 2021 — they are important documents to hold onto because you’ll want to refer to those amounts when filling out your tax return. 

Written by Aimee Picchi —With reporting by the Associated Press.

Source: Here’s how long it will take to get your tax refund in 2022 (msn.com)

Here’s how long experts say you should keep your tax returns

Are Your Papers in Order?

After going through the annual chore of filing tax returns, most people want to put the ordeal behind them. But before banishing the experience from memory, there’s one more important task to complete, and that’s properly saving the supporting documents used with your annual return. Here are tips from accountants and personal-finance experts about what to save, what to throw away, how long to keep tax-related materials, and how best to store these important documents.

The Three-Year Minimum

As a general rule, most financial professionals recommend hanging on to documentation supporting your annual tax return for at least three years. Why three years specifically? “The IRS can audit your tax returns for up to three years after the tax filing deadline,” explains Logan Allec, certified public accountant and owner of the personal finance blog Money Done Right. For businesses or the self-employed in particular, the IRS suggests hanging onto records that “support an item of income, deduction or credit shown on your tax return.” 

The Six-Year Rule

Did you fail to disclose all income on a tax return? If the answer is yes (shame on you), then plan to hold onto important financial documentation for even longer than three years. “If you underreported income by more than 25%, the IRS can audit your tax return six years later,” says Allec of Money Done Right. More specifically, the IRS website states that “if you do not report income that you should report, and it is more than 25% of the gross income shown on your return,” you should maintain related records for six years. Allec suggests maintaining any documents that verify your income, deductions, or credits earned.

Did You Skip Filing a Return Altogether?

If for some reason you opted to forgo filing a tax return in a given year, the IRS website recommends keeping all financial records and documents related to the year in question indefinitely. You’ll also want to keep records forever if you filed a fraudulent return, according to the IRS website. Also, we probably shouldn’t even have to say this, but here goes: Filing a fraudulent return is a really, really bad idea. 

What to Save

Aside from worrying about how long to save supporting documents and paperwork, you also need to think about what exactly must be saved. Beth Logan, a tax professional and enrolled agent with Massachusetts-based Kozlog Enterprises, says you should keep everything that ‘proves’ what’s on your tax return. “Important items include W-2s, proof of the purchase price of the assets on your return, proof of the losses, business books with receipts or proof of payments,” Logan said. “If you take the standard deduction, then you can throw away your donation receipts and medical receipts because you did not claim these deductions.”

Documentation related to property ownership should also be maintained for an extended time. The IRS website explains that it’s a good idea to keep “records relating to property until the period of limitations expires for the year in which you dispose of the property.” These records must be maintained to determine any depreciation, amortization, or depletion deduction. Such documentation is also needed to help calculate gains or losses when you sell or dispose of the property. 

Save Important Documents Electronically

While you can obviously save hard copies of your important tax-related documents, some experts suggest it’s an even better idea to store these items electronically. “Electronic format is the best way to keep your records … especially since the ink on paper and receipts wears off,” said accountant Thomas Williams, co-founder of Deducting the Right Way. “You can either use a scanner or a mobile device to take pictures of the documents. Store them on an external hard drive or cloud-based platform. Make sure you have clear images before destroying the originals.” 

Organization and Storage Strategies for Hard Copies

If you eschew electronic document storage, then consider keeping your financial documents and tax returns in a locked file cabinet or a fireproof safe, suggests Ben Watson, a CPA and CFO of DollarSprout.com. “Paper copies should be kept in a locked cabinet or drawer to prevent thieves from stealing sensitive personal information such as your full name, Social Security number, or banking information,” Watson said. “A fireproof safe can protect these and other important documents in the event you experience a disaster.” You should also consider saving your paperwork chronologically by year, Watson adds. “Consider each year a chapter in a book that you’re compiling telling the financial story of your life,” he explained. 

Paperwork You Can Ditch

While it’s important to maintain things like W-2s and receipts for expenses, you don’t have to hang onto everything from a given year, says Allec of Money Done Right. “Generally, you can get rid of your pay stubs after you have double-checked them with your W-2s and ensured that they’re all equal,” Allec said. “ATM and deposit receipts can be shredded after you’ve double-checked them with your monthly bank statements.” There’s also no need to hang onto bills after you’ve paid them, except when they support a tax deduction or credit that you received, Allec says. 

Determining When It’s Safe to Shred

While it sounds obvious, the three- or six-year period for maintaining supporting documentation for a tax return starts from the due date of the return, or from the date you filed the return if you filed it late, says Tim Yoder, tax and accounting analyst for FitSmallBusiness.com. “In other words, if a taxpayer extends his or her 2019 return until October 15, 2020, he or she must retain [their] records until October 15, 2026.”

Even When You Think It’s Safe to Toss It….

Even after the IRS statute of limitations has elapsed with regard to audits, you still might not be able to throw that documentation in the garbage bin or put it through the shredder yet. The IRS advises that “when your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.” Let’s all share a collective sigh together now. 

Article by Mia Taylor for Cheapism©

Source: Here’s how long experts say you should keep your tax returns (msn.com)