Fill all taxes correctly the first time. Common sense dictates that you should avoid bouncing checks to the IRS, failing to declare winnings on a popular reality television show, and not attempt to file your own taxes when you have a complicated fiscal situation (e.g. you own a diverse set of liquid assets, have partial ownership of a business, have received an inheritance, etc.). By filing your taxes correctly the first time, you can earn every dollar you are legally entitled to.
Do NOT stretch the truth
- Charitable deductions Certain deduction such as charitable donations and business expenses need to remain reasonable. Eyebrows tend to be raised when an individual that earned under $30,000 in the past year made a charitable donation worth $10,000. Donating to a fake charity (e.g. the help me and my roommates upgrade our kitchen and entertainment system charity) does not count. Similarly, a low-end car purchased in 1998 probably should not be valued at $15,000 when donated.
- Claiming a false AGI Other red flags for the IRS include those working at jobs that are primarily paid in tips. A waitress who claimed a single income of $20,000 per year probably would barely scrape by, not have recently purchased a luxury vehicle. The IRS views those making large purchases while claiming a low gross annual income as one of the first groups to audit.
- Concerns for self-employed employees Those who are self-employed also need to be cognizant about how many deductions are realistic. For example, claiming that your living room is your home office is largely missing the point. Similarly, making claims that over 25% of your primary residence is used as a home office can seem skeptical. Also, careful records of mileage driven for work and work related lunches need to be reasonable. Keep all receipts and logs in dated envelopes dated by week to avoid confusion.
An easy way to keep records for tax season
Instead of scrambling to find loose receipts during tax season, get in the habit of keeping weekly records. Keep all logs in a logical place. For example, keep a log of mileage driven in your car. Also, keep track of all pertinent account numbers that correspond to various investments such as mutual funds and employee stock programs in a safe place for ease of access.
When you absolutely need an accountant
U.S. citizens working abroad under a work permit almost always need to consult with an accountant with specialized experience as U.S. are not exempt from U.S. taxes unless they formally renounce their citizenship. If unsure about anything, always hire an experienced accountant.