Even if you’ve hired an accountant to help you file your taxes, there are things you should know on your own about filing. In fact, if you were to ask your accountant, most would likely share many of the same pearls of wisdom regarding the important things many people overlook — or are simply unaware of — regarding the whole tax-filing process. Here are some of the IRS’ “secrets” that your accountant likely wants you to know.
Audits Are Pretty Rare
It’s quite amazing how three little letters — “IRS” — strike fear into the hearts of so many Americans. The reason is that most taxpayers have a somewhat irrational fear that the IRS is this monolithic agency scouring every single tax return for the slightest error so that it can knock on your door and put you through hell. Not only does the IRS not have the time nor the manpower to look closely at every tax return, but it’s also actually extremely rare — in the aggregate — to get audited.
As of 2020 — the most recent year for which data is available — a minuscule 0.6% of all taxpayers were audited. For those earning between $25,000 and $200,000 — in other words, for most Americans — the chances were even slimmer, falling to just 0.4%. That puts the odds at about 250-to-1 that you’ll get audited.
The IRS Isn’t as Intimidating as You Might Think (Usually)
Even with those tiny odds, it is a fact that at least some taxpayers will get audited every year. But even in that unfortunate situation, it’s rarely as bad as you think it might be.
While the word “audit” might put images of a nerve-racking face-to-face with an IRS agent in some dimly lit government building, the reality is that the vast majority of audits are conducted by mail — roughly 70%, according to H&R Block.
Usually, an “audit” is simply a written request from the IRS for you to provide them with extra information to corroborate the claims on your tax return. If you can substantiate everything you’ve filed, you won’t have to worry about anything at all. But even if the IRS makes an adjustment, it typically just results in another letter stating you owe some additional taxes and penalties to the government. In other words, the fears of being tossed in the slammer over an audit are hugely overblown.
Documentation Is Everything
In many ways, the IRS takes what you claim on your tax return in good faith. As the agency can’t possibly verify every single line on every single tax return, it uses computer algorithms to “approve” most returns that fall within normal parameters. For the most part, this means that if you submit a reasonable tax return, it likely won’t merit any further review.
However, your accountant would likely stress to you that this does not give you free rein to simply make up numbers to put on your tax return. Rather, you should complete every tax return as thoroughly and accurately as possible — because if the IRS does come knocking at your door (at least metaphorically), you’re going to need to provide written proof for all of your claims. If you don’t have the documentation to back up your tax return, even if you acted in good faith and all of your numbers are 100% accurate, the IRS is unlikely to look favorably on your submission.
In other words, if the IRS claims that your numbers are wrong and you owe more taxes, you’re going to have to bite the bullet and pay up unless you can substantiate in writing what you claim on your return. This is why documentation is everything when it comes to filing your taxes.
Yes, You Have To Report Your Cryptocurrency Transactions — and They May Be Taxable
Cryptocurrency is a relatively new asset class, and many are still trying to figure out how it is all taxed. But the IRS considers cryptocurrency to be a capital asset, the same as stocks or exchange-traded funds. This means if you sell your crypto at a price above what you paid for you, you’ll be liable for capital gains tax.
Things get tricky if you use your crypto to buy goods and services, such as a cup of coffee. The IRS considers these transactions to be taxable as well, as you are exchanging one asset for another. As this area of tax law can get quite complicated, you’ll likely want to speak with an accountant about all of your crypto transactions to keep out of trouble with the IRS.
You’re Responsible for Paying Taxes on All of your Taxable Income — Even If the IRS Is Unaware of It
For the most part, the IRS gets its own copy of all of the income you earn in a given year. For example, when you receive a W-2, 1099s or other tax documents from people or institutions that pay you money, the IRS also receives its own copy. But certain payments may fly under the radar. If someone pays you less than $600 for your goods or services, for example, they aren’t required to issue you a 1099. But your accountant would likely stress to you that you must report all income to the IRS, even if it doesn’t otherwise know about it.
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