There are three ways that taxpayers most often get into trouble with the tax authorities. Recognizing these three tax traps can help us avoid them.
- Under-reported income. This is usually the most obvious omission and usually easiest for tax authorities to spot and assess additional taxes. Sometime the taxpayer’s omission is deliberate and sometimes it is simply a matter of a forgotten income account where a year-end filing did not arrive in your mail.
- No legal basis for position. Sometimes taxpayers calculate income and taxes in a way that is not recognized by the authorities. Some concepts might make perfect sense to you but the tax authorities have a different viewpoint. Guess who wins?
- Lack of documentation. Your positions might be legitimate and accurate but you are unable to provide documentation in response to an exam. In some cases you are entitled to a reasonable estimate but in other cases, like auto and travel expenses, the entire position is rejected if full required documentation is not available.
Watch out for these three and you will avoid trouble with tax authorities.