A Real Tax Court Case: What Went Wrong and How to Avoid Costly Mistakes

Case Summary:

The taxpayer under-reported $175k in W2 wages on their 2018 return. When the IRS initiated an audit, the taxpayer responded by amending their return, claiming non-cash charitable donations totaling $85,000 ($50,000 to Goodwill and $35,000 for 20 books). Unsurprisingly, the IRS rejected these donations due to lack of proper documentation, and the penalties were upheld. 

Where It Went Wrong:

1. Under-reporting Wages: The IRS receives copies of W2s, 1099s, and K1s, so failing to report this income will trigger a red flag.
2. Unsupported Charitable Deductions: Non-cash donations over $5,000 require detailed appraisals and documentation. In this case, no such evidence was provided.
3. Amending Returns After an Audit: The taxpayer attempted to fix the situation with aggressive deductions, which the IRS did not take kindly to.

Our Approach:

We take a proactive approach by obtaining Form 8821 as part of our client on boarding process. This allows us to automatically request a Wage & Income Report from the IRS to ensure all income is accurately reported before filing. This strategy helps avoid the type of mistakes seen in this case and provides peace of mind (for all of us). 

Therefore:

• Report all income accurately: Avoid the risk of triggering an audit by under-reporting income.
• Verify your income: Before filing, we run a Wage & Income transcript to make sure all income is accounted for.
• Document charitable donations properly: Non-cash donations over $5,000 require careful documentation, including independent appraisals and receipts from the charity.

Key Takeaway:

If you’re facing an audit or preparing to file your taxes, make sure your return is backed by solid documentation, and be proactive to ensure accurate reporting and  avoid the costly mistakes like those made in this case.

Need More Personalized Advice?

If you need help implementing these practices or have specific questions about your tax situation, we’re here to assist.