What Filing Mistakes are Likely to Trigger IRS Audits in 2021?

Individual and business taxpayers need to be careful to completely and accurately disclose their taxable income on their annual returns. Inaccuracies and inconsistencies – both intentional and unintentional – can lead to Internal Revenue Service (IRS) scrutiny, and this scrutiny can, in turn, lead to fines, interest and other penalties. Here, Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses some particular filing mistakes that are likely to trigger IRS audits in 2021:

1. “Typical Return Errors”

The IRS recently issued a News Release warning taxpayers to, “steer clear of typical return errors” when filing their annual returns. Since the IRS has called out these errors specifically, making these errors is particularly likely to lead to an IRS audit in 2021. Fortunately, most of these errors are fairly easy to avoid (in most cases), including:

• Reporting all taxable income
• Accurately transcribing Social Security numbers (SSNs) and Tax Identification Numbers (TINs)
• Choosing the correct filing status
• Signing and dating all necessary forms
• Meeting the May 17, 2021 filing deadline (or requesting an extension)

2. Failing to Report Cryptocurrency Transactions

The IRS is cracking down on cryptocurrency investors. It has made this clear in recent years, and it is becoming more aggressive in its efforts to identify and pursue taxpayers who fail to report taxable cryptocurrency transactions.

3. Failing to Disclose Offshore Financial Assets

Enforcing U.S. taxpayers’ obligations to disclose offshore financial assets is another current enforcement priority for the IRS. This includes disclosing offshore accounts and other offshore assets, and it includes meeting taxpayers’ filing requirements under the Foreign Account Tax Compliance Act (using IRS Form 8938, in most cases) and the Bank Secrecy Act (using the FBAR).

4. Claiming Fraudulent Deductions

Claiming fraudulent deductions is a common form of tax fraud. The IRS targets both individual and corporate taxpayers that claim fraudulent deductions in an effort to minimize their federal income tax liability. While inadvertent filing mistakes can lead to civil penalties under the Internal Revenue Code, taxpayers who are found to have intentionally underreported their federal income tax liability can potentially face criminal prosecution.

5. Using Abusive Tax Structures

In addition to cryptocurrency and offshore disclosure violations, the IRS is also placing particular emphasis on combating abusive tax structures. This includes abusive micro-captive insurance arrangements and conservation easements—among others. Due to the IRS’ emphasis in these areas, U.S. taxpayers who need to report micro-captive insurance arrangements or conservation easements on their annual returns will need to be particularly careful to ensure that they are in full compliance with all pertinent federal requirements.

Questions or Concerns? Contact Virginia Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

Do you have questions or concerns about what you need to disclose (or what you have already disclosed) to the IRS in 2021? If so, you should consult with an experienced tax lawyer promptly. To schedule an appointment with Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 703-752-3752, email ket@thornlawgroup.com or contact us online today.