With the April 18 tax deadline creeping up, it’s easy to get caught up in the crunch to file your federal and state tax returns, but rushing through preparing your tax returns might inadvertently raise red flags for the IRS or Illinois Department of Revenue (IDOR) to scrutinize. Here are four areas to watch when preparing and filing your tax returns.
Red Flag #1: Income
Generally, your earned income will be reported to both you and the government on the applicable forms, like W-2, 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099-MISC, 1099-R, and SSA-1099. If the income you report on your tax returns doesn’t match government records, you could find yourself facing information requests and even fines. Take your time to ensure all your income forms are accounted for and the proper totals are entered onto your returns. Also, be aware that there’s no form for some taxable income, like proceeds from renting your vacation property, meaning you’re responsible for reporting it on your own.
Red Flag #2: Investments
In most situations, selling an investment is a taxable event in the year of the sale. To determine the tax consequence, you’ll need to know and report when and what you paid for the investment and when and what you sold it for. Financial institutions are required to provide this information on Form 1099-B, but there are situations where you’re responsible for supplying that information: stocks (including real estate investment trusts) acquired before Jan. 1, 2011; mutual funds, exchange-traded funds, and dividend reinvestment plans acquired before Jan. 1, 2012; and other specified securities, including most bonds, derivatives, and options acquired before Jan. 1, 2014.
In other words, keep good records of all investment purchases and sales, and be sure to report not only the transactions that your financial institution reports on your various 1099 forms, but also the transactions you’re responsible for independently reporting, to ensure you’re not overreporting or underreporting your taxable income.
Red Flag #3: Deductions
The IRS and IDOR scrutinize tax deductions to discourage abuse and unsupported claims. Consider charitable or other itemized deductions, for instance, which could be a red flag if they’re especially large or unusual. Be aware of the documentation rules for charitable contributions and be sure to keep meticulous records to support all deductions you claim on your tax returns.
Red Flag #4: Incorrect Information
The simplest mistakes can raise the largest red flags. A misspelled name, an incorrect Social Security or tax ID number, or a missing signature can all cause substantial problems and delays in processing your tax returns. In other words, review all the fields throughout your returns for accuracy. And keep in mind that even tax-preparation software doesn’t always catch all your mistakes.
The rush to file federal and state tax returns is always a hectic and complicated process. The Illinois CPA Society reminds taxpayers that CPAs, certified public accountants, have your back. CPAs are strategically positioned to help prepare and file your tax returns while determining the best ways to maximize your tax deductions and tax refunds. The Illinois CPA Society’s free “Find a CPA” directory can help you find the trusted, strategic advisor that’s right for you based on location, types of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.
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