2020 has been a unique year with lots of activities and interesting policies. With the distraction from the COVID-19 pandemic, it is easy to forget essential tax rules necessary. Also, when you consider the three months tax day extension as well as the various CARES Act stimulus package, one can easily be carried away.
We, however, have some essential tax Rules that can help you be on top of your tax situation.
All the tax forms you got in January are linked to your Social Security Number. Do not ignore them as the IRS also receives a copy. You need to keep track of them as the IRS will use them in validating your claims.
Also, even if you do not get a 1099 Form, Uncle Sam considers this as income. Whatever the source of your income, Uncle Sam considers it taxable, even if it is in kind. Won a lottery? Got debt forgiveness? It is taxed.
Your 2019 Form 1040 comes with a new question at the top of the Schedule 1. You need to disclose whether you transacted (sold, sent, gave, received) in virtual currencies during the year. As a result, if you sold any virtual currency, you should enter the detail in the appropriate section of your tax return.
To the IRS, crypto is a property that should produce a gain or loss during transaction. With this, make sure to answer carefully all the questions on this on your form.
Your tax return should be straight to the point. If you will be making any explanation, it should be brief and concise. You should not attach more than your tax funds and a plain A4 sheet detailing any other relevant info like income, additional deductions. It does not make sense to attach other documents as the IRS will ask if it wants.
While foreign account generates income for many people, it might not come with a Form 1099. It is, however, a good idea to report it. In addition, you should file an FBAR if you have above $10,000 in all your foreign account any time of the year.
IRS scrutiny is pretty high with the Foreign Account Tax Compliant Act. Failure to report can come with grave consequences hence be careful.
You should be aware of how long the IRS can audit. After filing your returns, the initial statute of limitation is three years after filing your return. You, however, need to be aware of other IRS limitation rules. For instance, understating your income by 25% or more gives IRS the license to check your tax record for 6 years. As a result, keep all your tax records.
There is a high probability that the amended returns will have a high audit rate. According to Uncle Sam, you should amend all filed returns if you discover an error. With this, when you find out that there is an error on your filing, adjust immediately.
Also, any modification you must make should amend everything, and not only the parts that favor you. For people getting a huge tax refund, don't ask for the cash. Instead, apply it to the coming year's tax payment.
There are software available for people to prepare their tax returns. If you, however, have a dispute or an audit, consider enlisting the services of a professional – a tax lawyer or an accountant. No audit is simple as it can encroach into other areas and extend beyond what was planned, if not careful.
Bear in mind that many criminal tax cases begin with simple audits. Be sure to get a tax professional that is experienced in your issue. They can be of tremendous help with advice or technical issues. Hire them as soon as possible. Do not wait until the last minute.
You do not want any trouble with Uncle Sam. The tax advice discussed above can go a long way to help. Also, make sure you respond to every IRS letter you get unless stated otherwise. You do not want to fight the IRS.
On a final note, do not ignore those small tax bills. You do not want to risk an audit with Uncle Sam by fighting over minute issues.
Advanced Accounting & Tax Planning