Avoiding the A Word!

 

For the past 30 years, my annual tax filing routine has gone something like this: I would meet Rocco, my most trusted advisor since 1990, in front of the historic rotunda clock at Grand Central Terminal, hand him my documents and hopefully two weeks later, he would return a completed 1040.

Not this year.

Since the outbreak of COVID-19 he has been working remotely, so I was forced to make a house call – mask and all. Truth be told, it was the first time I had ever been to his house despite our three-decade relationship.

In any event, this year unlike the past five, the missus and I are getting a refund from both the federal and New York State. Despite the good fortune in a year that has had decidedly little to offer in that department, I’m always wary that a reversal like that could potentially trigger the dreaded “A” word – audit.

So, this being the height of filing season, there was hardly a shortage of articles and features on the minutiae of what can and cannot be deducted and red flags on items that could prompt the IRS to send a letter your way.

So, in the spirit of filing season herewith are just a few:

1.      Overly large charitable deductions. Seldom do charitable donations raise eyebrows by an examiner, but in the case of the Michigan man whose W-2 showed his income as 60k, and who claimed $140,000 in deductions, even a first-year accounting student would pick that up.

2.      Incorrect business expenses: Despite repeated guidelines, some filers continue to classify costs of a hobby versus legitimate business deductions. Like the man who attempted to write off veterinary bills for his horses because he often took clients riding.

3.      Home office deductions: This is an area where it gets a bit cloudy and requires you to compare the square footage dedicated to a home office compared to the gross area of the home.

4.      Failure to report cryptocurrency payments. This is well above my pay grade but if you received in excess of $20,000 in virtual currency payments, you would receive either a 1099-K or 1099-B.

5.      You earned a lot of money: Again, this is far afield from my situation but the more you earn, the more likely you will be audited. In 2019, people earning $200,000 to $1 million had an audit rate of less than 1 percent, but the audit rate rose to 2.4 percent for taxpayers earning $1 million or higher.

Happy filing!