Every year around this time, we start to see articles pop up online about steps individuals and businesses can take to reduce their income tax liability. Many of these articles focus on end-of-year tax deductions. But is taking these end-of-year tax deductions really a good idea? Or, could doing so get you into trouble with the Internal Revenue Service (IRS)? Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains:
Is It Safe to Take End-of-Year Tax Deductions?
In general, it is safe to take end-of-year tax deductions. The IRS doesn’t really care when taxpayers take deductions—as long as they comply with the law. So, if you have deductions you can take to reduce your income tax liability, the fact that you take them at the end of the year generally has no bearing on their legitimacy.
The bigger question is whether you (or your business) can take the deductions at all. While there are several well-known (and lesser-known) tax deductions, many taxpayers have misconceptions about when they are available. For example, we frequently see cases in which taxpayers have made mistakes with regard to:
- Home office deductions
- Business expense deductions
- Payroll deductions
- Depreciation deductions
- Charitable deductions
- Conservation easements
- Investment loss deductions
- Retirement plan contribution deductions
This year, individual and business taxpayers will need to be particularly careful when claiming deductions related to the American Rescue Plan Act, Paycheck Protection Program (PPP) and other pandemic relief programs. These programs all have very specific rules pertaining to tax consequences, and the IRS has already shown a willingness to target taxpayers suspected of unlawfully taking advantage of these programs—whether intentionally or inadvertently.
Reducing Your Risk of an IRS Audit in 2022
Excessive and improper deductions are red flags for IRS revenue agents. Individuals and businesses claiming fraudulent end-of-year tax deductions will be at risk of facing audits in 2022. To mitigate this risk, taxpayers can take steps including:
- Ensuring that they qualify for the deductions they claim, including ensuring that they are eligible for the amount of the deduction taken (some deductions, such as the deduction for tangible business personal property, are subject to annual limits);
- Ensuring that they have adequate documentation to substantiate their deductions (including charitable deductions and charitable easements, which have been priority enforcement areas for the IRS in recent years); and,
- Paying particular attention to deductions that significantly exceed the amounts claimed in prior years (while this may have a valid explanation, the IRS views significant year-over-year increases in taxpayers’ deductions as a potential red flag for fraud).
Speak with Virginia Tax Attorney Kevin E. Thorn in Confidence
If you have questions about the tax deductions you can claim for the 2021 tax year, we encourage you to contact us for a confidential consultation. We can help you understand the relevant provisions of the Internal Revenue Code, and we can help you avoid mistakes that could lead to IRS scrutiny. To request an appointment with Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 703-752-3752, email ket@thornlawgroup.com or contact us confidentially online today.
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