You may already know there will be a problem. There were a number of issues this year that will naturally lead to many individual tax returns being much more complex than usual. Unfortunately, that complexity can bring on an IRS audit.
Here are several potential issues that could affect your 2021 tax return:
The pandemic has had far-reaching effects on the economy and society. The federal government moved forward with a number of stimulus programs, including direct stimulus payments and advance child tax credits. Many more people than usual drew unemployment compensation. And, a large number of taxpayers began working remotely, which sometimes meant they needed to file taxes in a different state.
The good news is that the direct stimulus payments won’t be considered taxable income. You should not include those payments in your overall income calculation. If you do, you may end up overpaying on your taxes and need to file an amended return to claim a refund.
Tens of millions of families have received advance child tax credits. As long as those credits were appropriate, you should have no trouble, but you do have to account for the money on your tax return. If you received advance child tax credits that you were not due, you will have to pay them back.
All of this change could be overwhelming to some taxpayers. You can bet that the IRS will be double-checking many 2021 returns to ensure compliance.
How to be ready for an audit
If you are not sure how the pandemic changes could affect your return, it’s a good idea to schedule a mid-year check-in with your tax lawyer. Essentially, this involves filling out a projected return so you can see what has changed and how it will affect you. It can help you identify potential problem areas and get a sense of what you owe.
Whether you think you owe taxes or the IRS may owe you money, you will need to back up your claims. Your tax attorney can help, but only if you are diligent about maintaining your files. Pull together the information you have about how much you received in stimulus money and child tax credits. Make sure you have your unemployment pay stubs in one place. Don’t get into an information crunch when the auditors contact you.
If you are audited and there is a significant amount of money at stake, invest in a highly experienced tax attorney to respond. This could be your best chance of avoiding garnishments, liens, levies and asset seizures.