This topic was irritating me for long time, and it finally spilled over. Every fall, consumer magazines publish flashy articles titled “25 Smart Tax Moves to Make Now” or “Cut Your Taxes Before the Year-End.” In the spring, the front pages of those same magazines feature titles like “Last-Minute Tax Tips” or “10 Steps To Slash Your Tax Bill.” Sounds like great public service, doesn’t it?
Yes, some information presented in these articles is correct and occasionally even useful. However, I still consider them a big disservice to the public. Why? Because they pull a random collection of tips from all areas of taxes, slap them together, and never bother to explain who would benefit from them. As a rule, such tips do not apply to many, if not the most, of the readers.
We always suspect (and we are often right!) that we’re missing on some of the tax breaks. We are eager to become enlightened about tax loopholes and secrets. We read an article about moving expenses – and try to deduct moving from one apartment to another, two blocks down the street. We read some insightful advice about capital losses offsetting capital gains – and rush to sell a great investment to “save on taxes.” We donate things (which is always nice) anticipating a tax deduction – even if we don’t itemize. The list goes on and on.
Let’s face it: People do costly mistakes based on irresponsible advice from consumer publications, because, as a rule, the advice is incomplete and cannot be applied without analyzing the reader’s particular financial situation. Yes, there’re disclaimers, but who reads them? Did you read mine, by the way? I did not think so.
To prove my point, I’ll take just one issue of a popular consumer magazine (the name is omitted to protect the guilty). Not a good excuse, but the magazine named a well-known website as the source of their “insightful” advice. The article was titled quite sexy:
An Ounce of Audit Prevention
Double-check your figures. Any math errors could draw attention. Have a specialist go over your numbers, or use tax software for greater accuracy.
My commentary
I’m so glad I got this advice before I filed my taxes! Every year before, I did not care about numbers. I was sure the IRS did not either. Thanks to the article, now I’m wiser. From now on, my numbers will be checked! Thanks, guys! Ok, maybe I shouldn’t be that sarcastic. At least, this advice – unlike others – did not cause any harm.
Avoid using whole numbers, such as $1,000. These numbers can suggest a fabrication of some sort.
My commentary
Well, this is true. But what do you suggest? Fabricating random numbers because fabricated whole numbers look bad? Gentlemen, numbers are not picked to “look good” – they should be true and accurate numbers. You must be able to prove all numbers, whether they are round or not. Maybe the author meant to say “don’t use estimates, use actual numbers”? I hope so.
Include copies of documents that support any unusual amount or item on your return, including large charitable donations, debts, investments, or any other eyebrow-raisers.
My commentary
Very bad advice. Quite sad, considering that the publication’s topic was IRS audit prevention. What you accomplish by attaching extra documents is exactly the opposite: you draw attention to the number that otherwise could go unnoticed. Think about the way returns are processed. An underpaid and under-trained clerk is typing your numbers into computer, one return after another. What is going to happen if something unusual is attached to your return? You’re right: it will be presented to a more experienced supervisor. Very good for IRS audit prevention, I should say! What you need to do instead is to keep all these documents handy in case the IRS asks for them. If they ask – then and then only you will submit your proof.
Make sure the 1099s from your broker, employer, or investment company match your return.
My commentary
Another insightful tip. How come I never thought of that myself?! Besides, I wonder how many readers understand what is “1099s.” Those who do understand, also know what to do with them. By the way, if your numbers do not match those of the IRS, you do not get audited. You simply get a letter asking for correction or clarification. No big deal.
Avoid using a Schedule C on your tax return. Instead, file a partnership or S corporation tax return for home-office deductions and other business expenses.
My commentary
True, returns with Schedule C for small business are audited much more often than “plain” returns. But you cannot legally file anything else instead! If you had business or self-employment income, you have to use Schedule C. There is no choice. To be eligible for “partnership or S corporation tax return”, you need to have – surprise! – a partnership or an S corporation! Until you go through the legal process of establishing them, Schedule C is your only option. Within the law, that is.
So, to read or not to read? You be the judge.