Nobody wants to be the target of an IRS audit. Fear of an audit leads taxpayers to believe myths about what may or may not catch the eyes of the IRS. Unfortunately, these misconceptions could steer taxpayers toward greater audit risk and a higher tax liability. Below, I unpack three widespread individual tax return myths — and reveal the truth behind them.
Myth #1: Extending an Individual Return Increases Your Chances of Being Audited
The IRS offers an automatic six month extension to all individuals with no explanation necessary. If the IRS viewed extended returns as risky, then there would be rules in place to restrict extensions. Quite the opposite is true — the IRS makes it very easy for individuals to file extensions.
Individuals may rush to file their personal returns out of fear that they will be penalized for an extension, even if their returns are incomplete or inaccurate. This behavior may result in higher audit risk if the IRS catches the inaccuracies. Instead, taxpayers should take the time to collect and review their tax information to ensure they have included everything. If that involves filing an extension, then it is better to extend than to file without all of the information.
While an automatic extension extends your time to file your income tax return, it does not extend the time you have to pay your tax. If you expect to owe additional money with your income tax return, then you will need to pay all tax due when you file your extension.
Myth #2: Getting a Large Refund Means You Are Maximizing Deductions and Minimizing Risk
A large income tax refund may simply mean that you are over withholding on your Form W-2 or overpaying your estimated taxes. That refund is actually interest-free money that you overpaid to the government.
Be leery of those who brag about their IRS Refunds. Rather than optimizing deductions, they may be getting back money that they had over withheld. Discuss your personal circumstances with your CPA to ensure that you maximize your deductions.
Large refunds have now become potential red flags for the IRS. With the drastic increase in identity theft, the IRS is now on the lookout for returns seeking large refunds to ensure that those returns are legitimate.
Myth #3: Individuals Should Not Take the Home Office Deduction Due to Audit Risk
Unlike in the past, working from home is very common today due to technology and the savings to companies in office space. Therefore, remote employees and the self-employed do not necessarily increase their audit risk.
There are some rules to consider. First, individuals can only claim space used exclusively and regularly for business. Also, the home office deduction is available only to individuals who do not have nearby access to a physical office location. Also, the deduction is only allowed to the extent of profit in the business.
If you have additional tax questions, give me a call at (713) 785-8939. I’d love to hear from you.