Tips for Preparing Your Tax Return So You Don't Get a Letter from the IRS

'Be careful when filing,' says Holly Signorelli, plus tips & links to checklists

Green check marks on a checklist, suggesting everything is good to go.
Checking a tax return before it's filed can help prevent unnecessary IRS scrutiny. © Alex Slobodkin / Getty Images

People need to be careful when preparing their tax returns because the Internal Revenue Service has a computer system that flags tax returns for further scrutiny based in part on how the IRS thinks your tax return should look. If the IRS does have questions, they will likely send a computer-generated letter asking for more information.

The problem is: "There's so many IRS letters going out," says Holly Nicholas Signorelli, a certified public accountant in Dallas, Texas.

"People don't really understand the IRS's new system."

What the IRS is Looking For

Some of the things the IRS computers check for are obvious. Are all W-2 forms reported? Ditto for income reported on 1099s and deductions reported on 1098 forms. Basically, all those tax documents that come in the mail, the IRS can check if your tax return includes all that information.

The IRS program goes further, though. "What it is, they created a program, and based on what they felt were abuses of the law," Signorelli says, "for example, deviates from average person, dings off and you get put in a pile. They'll flag it and want back up. They do that with all sorts of line items."

The IRS Computers Run on Auto-Pilot

How big is the problem? "The IRS automatically issues millions of notices every year," observes National Taxpayer Advocate Nina Olson in her 2014 Annual Report to Congress (page 149). Olson describes the IRS's computer program as follows: "The IRS ACE program exists solely to conduct examinations with little or no human involvement.

Notices and letters are sent automatically via a computer program without specific contact information.... These letters notify taxpayers that their refunds have been frozen, deductions have been disallowed, further information is required to verify the return, and more."

How to Protect Yourself

"Be careful when filing," Signorelli advises.

"We've found in the last few years, it takes longer to do a return, you have to make sure it's exactly in the right spot."

"I think TurboTax is a great program," Signorelli says, and she went on to give some advice to do-it-yourselfers. "You really have to take your time and look at the tutorial and answer all the questions properly."

Here are some of the tax issues that are at the top of Signorelli's mind for this filing season when it comes to steering clear of unnecessary scrutiny from the IRS:

  • 1099-MISC forms are issued in the name of the contractor instead of their business entity.
    "A lot of time people will incorporate. They don't alert the people they are working with, so they get 1099 under Social Security number. This happens a lot. But you got 1099 individually. That would be on corporation, but if you.... maybe don't even get a copy. They get a bill for an exorbitant amount of money. Billed on whole 1099 without expenses."
  • The same income is reported on both the 1099-MISC and the 1099-K forms. "If you pay someone by credit card, because they will get 1099'd by credit card company. People maybe incorrectly 1099, potential to double up." Essentially, if you pay by credit card, you don't need to send out a 1099-MISC. The IRS buries this little tidbit in their instructions for Form 1099-MISC.
  • Be extra careful with business-related losses: "Like losses on schedule C. multilevel marketing, they get audited almost 100%. If IRS sees you have big w2 and a loss. They paid all these expenses and then they get audited."

Holly Nicholas Signorelli, a certified public accountant in Dallas, Texas. She is the author of Do You Know Where Your Money Is?® She can be reached through her Web site: themoneytherapist.com.

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