Red Flags and Tax Tips to Help You In Preparing Your Taxes

Don’t Ignore your Tax Preparer’s Red Flags.

Tax season is either the best of times or the worst of times. Either you’re eagerly waiting for the Internal Revenue Service (“IRS”) to issue you a juicy refund, or you’re searching and scraping for any deduction or tax strategy that can minimize your tax liability.

As the April 18, 2023 deadline is approaching, people might find themselves in “panic mode” and susceptible to making poor decisions this tax season. While there is a temptation to rush your taxes or take “extra” deductions, it is important to understand that when dealing with the IRS, the risk is often significantly worse than the reward.

It is one thing to give advice, but much better to give examples. The following tips below should provide some simple help as you and your tax preparer attempt to navigate the 2022 federal income tax filing season.

1.     File your taxes on time. While this is the most straightforward and most obvious tip for someone trying to make it through tax season, most tax issues stem from a taxpayer failing to file on time. This is one of the most important steps because the IRS has the authority to charge penalties to a taxpayer’s account if they fail to pay on time. More specifically, “failure-to-file” penalties accrue at 5% of the unpaid balance and maximize at 25% of the unpaid balance. Therefore, any good tax professional will tell you to always file, even if you have no money to pay.

2.     Watch out for contingency Fees. Though many tax preparers operate their businesses by collecting a fee based on the size of the refund, they’re able to secure it for the taxpayer. There are several problems with tax preparers accepting contingency fees. The taxpayer is encouraged to take as many deductions are possible since their pay depends on getting as much money as possible in refund dollars. While this may seem appealing to many taxpayers, this practice is unethical. Ultimately, this is usually done by “fly-by-night” tax preparers who will disappear as soon as they secure payment from the refund. Once they are gone, you will be left defending yourself in an audit to explain why you claimed $15,000 in meal expenses for your photography “business.”

3.     Keep good records. I could say this one thousand times for emphasis, and it still wouldn’t be enough. Regardless of who you hire, what line of business you are in, and how much money your business earns, please be sure to keep good records. Every year the IRS selects random returns for audits, and those operating small businesses are at a greater risk of being picked up for these random audits. If your records are organized, an audit will go smoothly, and the IRS will likely just want proof that you really had the deductions that you claimed. From personal experience, bad records can be costly for taxpayers, leading to disallowance in full or in part of business deductions, ultimately resulting in higher tax liability. In summary: keeping good records can be expensive now, but bad records will be very expensive later.

4.     Pay attention to titles. As we briefly touched on, if you have a tax situation that is more complex than a W2, please find a true tax professional who can offer you assistance tailored specifically to your tax needs. A good sign is when someone is licensed as a professional, such as a Certified Public Account (CPA) or attorney. While a title isn’t dispositive as to someone’s skill and professionalism, it usually indicates that a person takes tax seriously as a career and will be available to help in the event that problems arise.

If you disregarded the advice in this article or find that you have unpaid tax liabilities, un-filed returns from multiple years, or any other tax compliance issues, then you may need to reach out to the attorneys at The Wilson Firm. The attorneys specialize in guiding clients through tax and penalty relief, as well as mitigating criminal tax issues.